Series 82: Premium Bonds

Premium Bonds

A corporate bond can be bought at either a premium or discount to its par value, and each has different tax consequences for the bondholder. If the bond is purchased at a premium, the bondholder can choose one of two alternatives at tax time. If the bond is sold for less than what it was bought for, the bondholder can take a loss on her taxes in the year of the sale. The loss is the difference between the purchase price and the sale price. A loss can also be taken if the bondholder holds the bond to maturity. In this case, the loss is the difference between what the bondholder paid for the bond and the face value of the bond—also called the premium.

An alternative method of dealing with the tax consequences is to amortize the premium over the life of the bond. In this case, a portion of the premium is subtracted from the bond’s annual interest, resulting in reduced reported interest. The amortized amount is determined by dividing the premium by the number o