Municipal Bond Forum
When premium bonds mature
Q
Can you educate me about tax-exempt bond amortization? On a bond we bought years ago, we paid 108 per unit. When it came due, we got our 100 per unit back. I would have thought that I had an $8 capital loss because of the sale. But instead, through TEBA, I’m told that I have no such thing. Indeed, the cost basis is back at 100. Is there a relatively simple explanation as to why this is so?
A
James A. Klotz responds:
The reason a capital loss cannot be taken when premium bonds mature is they are purchased with the inherent understanding that they mature at 100.00.
Keep in mind however, when you buy premium bonds, by definition they produce more current income than par bonds and every dollar invested, including premium dollars, is working at the stated yields. Therefore, there is no loss incurred.
For more on premium bonds, please visit “The Smart Buy in Today’s Market.”
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