Bond premium amortization


J

Jay

IRS Publication 550 talks about premium amortization for
taxable bonds. I've learned how to calculate the
amortization in normal cases of taxable bonds held to
maturity (see below), but have two questions about the
details.

First, it's common to buy a bond between interest payment
dates. For example, suppose a bond pays interest each
January and July, but you buy it in May. Is a special
calculation required for the initial short May-to-July
interval? Or is it ok to calculate the amortization the same
as when the bond is held the entire six months?

Second, amortizing is optional for taxable bonds. Suppose
you chose not to amortize before, but to start amortizing
for the 2003 tax year. How do you do the calculation for a
bond that you could've started amortizing in 2002? Do you
start with the old original cost and amortize the entire
premium over the shorter interval from 2003 to maturity? Or
do you consider 2002 to be a lost opportunity, and end up
later (at maturity) with a capital gain equal to the
calculated (but not used) 2002 amortization amount?

Thanks in advance!

________________________
This is "below":
There's an Excel template for "Bond Amortization" at
http://office.microsoft.com/templates/
under "personal finance." Fill in the first four parameters,
then use "goal seek" to calculate the "effective rate" that
makes the final "carrying amount" value equal to the "face
value."
 
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