Methods of External credit enhancements (provided by a third party)
o Surety bonds
are issued by insurance companies
are a promise to make up any shortfall in the cash available to service the debt.
o Bank guarantees serve the same function.
o Letter of credit a promise to lend money to the issuing entity if it does not have enough cash to
make the promised payments on the covered debt.
While all three of these external credit enhancements increase the credit quality of debt issues and
decrease their yields, deterioration of the credit quality of the guarantor will also reduce the credit
quality of the covered issue.
b) Taxation of bond income
b.1) Interest income
Most often, the interest income paid to bondholders is taxed as ordinary income at the same rate as wage
and salary income.
Special cases:
(1) Municipal bonds in the US: interest income is often exempt from:
national income tax
any state income tax in the state of issue
Người mua nhà
Người cho vay
mua nhà
Người cho vay đối
với người cho vay
mua nhà
Money
Trả gốc
Trả gốc
Money
HĐ vay
HĐ mua bán TP (covered
bonds/ ABS/ MBS)
Lender
Borrower
Bond
issuer/
Bond holder/
Lender
Yield (lãi suất)
Yield (lãi suất)
Mai Nguyen
Dawn of Finance
6
(2) Original issue discount (OID) bonds/ Pure-discount bonds (P
The gains over an OID bond's tenor as the price moves towards par value are really interest
income these bonds can generate a tax liability even when no cash interest payment has been
made.
A portion of the discount from par at issuance is treated as taxable interest income each year.
allows that the tax basis of the OID bonds is increased each year by the amount of interest income
recognized
there is no additional capital gains tax liability at maturity.
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