(3) Premium bonds (P>F): Some tax jurisdictions provide a symmetric treatment for bonds issued at a
premium to par, allowing part of the premium to be used to reduce the taxable portion of coupon
interest payments.
b.2) Capital gains income
a gain or a loss relative to its purchase price when a bondholder sells a coupon bond prior to maturity
Capital gains are often taxed at a lower rate than ordinary income.
Capital gains on the sale of an asset that has been owned for more than some minimum amount of time
may be classified as long-term capital gains and taxed at an even lower rate.
𝒕
𝒍𝒐𝒏𝒈 𝒕𝒆𝒓𝒎 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒈𝒂𝒊𝒏
< 𝒕
𝒔𝒉𝒐𝒓𝒕 𝒕𝒆𝒓𝒎 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒈𝒂𝒊𝒏
< 𝒕
𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕
5) Structure of Cash Flows of fixed income securities (Los 42.e) a) Fixed – coupon structure a.1) Bullet structure (gốc trả một lần vào cuối kỳ)
Periodic interest payments (coupon payments) are made over the life of the bond
Principal value is paid with the final interest payment at maturity
Balloon payment the final payment includes a lump sum (principal amount) & the final period's
interest
Eg: Consider a $1,000 face value 5-year bond with an annual coupon rate of 5%. With a bullet structure,
the bond’s promised payments at the end of each year would be as follows.
a.2) Amortizing loan structure (gốc trả dần trong kỳ)
the periodic payments include both interest and some repayment of principal (the amount borrowed)
Fully amortizing the principal is fully paid off when the last periodic payment is made.
Eg: Consider a $1,000 face value 5-year bond with an annual coupon rate of 5%. With a fully
amortizing structure, the bond’s promised payments at the end of each year would be as follows
Mai Nguyen
Dawn of Finance
7
How to calculate PMT:
PV = -1,000 (=F); n = 5; I/Y = 5%; FV = 0 PMT = 230.975
