If you purchase a bond that is paying out interest rates higher than the markets interest rate a bond premium will be included in the purchase price. The market uses the bond premium to adjust the price of a bond that has too high of an interest rate.

Dealing with bond premiums can make record keeping difficult. It is recommended to repay the sum of the premium over the lifetime of the bond so you can allocate the premium over the years that the bond pays interest. This will greatly reduce the interest of the bond. Whenever adjusting the bonds interest rate ensure that you are doing so with an effective interest rate allowing the bonds annual interest to be recorded the same at yield as it is at maturity.

Ignoring the bond premium is a tactic that will reduce bond costs as well as save on complex record keeping. You ignore the bond premiums and overstate the interest that was accumulated over the lifetime of the bond therefore showing you are paying higher income tax on the bond during those years. When the bond matures you will be able to record a capital loss that will be equal to the premium of the bond that you have but were never forced to record.

By ignoring the bond premiums until their maturity and simply recording the premium as a loss or even a final year adjustment on the bonds interest will ease the pain of record keeping throughout the year.

It is true: the IRS allows U.S. taxpayers to engage in this strategy of ignoring bond premiums for years end calculations. You are simply overstating the interest amount earned with your bond investment.

Bonds paying smaller interest rates from the markets are able to use the bond discount. A bond discount will be dealt with in a similar fashion as the bond premium.

When you have purchased a bond discount you are required to allocate that discount over the years of the bonds lifetime with it being treated as additional interest. A good example is if you purchased a $500 bond with a $600 return upon its maturity you would earn a $100 profit that is counted as the interest amount. This is a similar method to the zero coupon bond.

The accrued interest should be counted anytime you use a bond discount. Make accrued interest amount equal to the bond discount amount which was allocated for that year. A bond discounts accrued interest is referred to as the amortization.

You should know that the IRS requires U.S. taxpayers to amortize the bond discounts, nevertheless if you are aware of the loop whole this can be avoided. This strategy when used properly can save record keeping time as well as money. Bond discount which show diminutive adjustments in their effective interest rates that were paid will usually mean you can skip the record keeping on amortization for the bond discount. Talk with a tax advisor if you are hesitant about what records you should keep or which strategies will bring the most earnings.

Graham McKenzie is the webmaster for a leading South African bond originator. For more information visit: http://www.bondcredit.co.za/

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