IRD Determination G3: Yield to Maturity Method for Bonds (worked example)

[Snow Leopard]

[All] Bonds are Financial Arrangements but not All Financial Arrangements are Bonds:

If you do a word search on Determination G3 you will not find the word Bond or the word Interest, so amongst the many possibilities this 'Financial Arrangement' between B (the buyer) and S (the seller) could be:

A five year loan with an initial value of $1.5m with 10 semi-yearly payments of $70,000 and a final repayment of $1m that B bought off A;

A unique loan which B & S entered into where the initial value is that $1,012,500 and the repayments are as specified;

The 'Bond' that Snoopy has assumed which B bought from A.

The history of, and precise type of this arrangement is irrelevant, from 12 Mar 1987 to the end on 15 Nov 1988 they all have identical profiles and G3 shows how to correctly calculate the income and make adjustments to the outstanding principal for tax purposes for the periods between payments.

Deciding to throw the method away and calculate the linear income over the entire period of the loan, which is what in a very roundabout way has happened in this post, is a pointless exercise.

Whether such a linear approach is even permitted in some other determination or other, I do not know. But given it is simple and straight-forward I very much doubt it.