Beginners

[Snoopy]

Thinking some more it gets even weirder. The figure at Q7 of this form has to be included in Other Income in one's IR3 tax return - it includes interest earned in current year - which IRD will already have recorded in one's dividends or interest received.

The income earned and tax paid figures supplied to you by the IRD are not set in stone. You are allowed to amend them if they are incorrect or incomplete (both of which has happened to me). They are also only 'bare figures earned' over one financial year. The figures do not record when bonds were bought or sold, and the tax deducted from bonds in any particular year may therefore not reflect your tax liability on those bonds (actual tax liability could be higher or lower). The final calculation, on winding up a bond, could also be affected by how much your tax rate has changed between tax years.

SNOOPY

[Snoopy]

So double taxed, unless you alter the IRD figures, and then you have to provide documentation justifying changing them.

Or they could be insufficiently taxed. So you have to provide documentation to justify changing the IRD figures. You have a problem with that? What did you expect?

I think an arrangement came in a few years ago that if you buy a bond on market you have a responsibility to equalize your income tax payments over the life of the bond, assuming you hold that bond to maturity (whether or not you actually plan to hold that bond to maturity). I don't think the bond issuer does this interest adjustment calculation for you. So that is another reason why your income tax due on a bond may not be the same as the income tax deducted by the bond issuer.

There are bond funds out there that do all this tax stuff for you. They have the disadvantage of management fees, and you being unable to select the maturity profile of the constituent bonds held. But they have the advantage of you being taxed at worst, at the maximum PIE tax rate of 28%.

SNOOPY

[ordop]

Can someone please give me a quick explanation on trading bonds...... My question is more around when you buy them say on direct broking why you trade with a selected rate vs an actual $value per bond? When you make a purchase say 6.5% x 5000 for example how many underlying bonds do you actually get? Or is it an actual value? What's comes through on your shareholder statement?
Thanks in advance and sorry for the rather basic questions

I'll give it a go for you, using the NZ market as our reference - sorry if this becomes tedious.
As a holder the registry will say something like - 5,000 bonds IFT250 15/06/2025 6.15%. The registry doesn't care what you paid for them in $ terms or yield terms on the market. They just record the quantity held by all holders at any point in time and who are the holders on the record date due the upcoming interest coupon payment.

NZ fixed rate secondary market works on a yield traded basis, as opposed to a price traded basis, in which Fixed Rate Bonds traded either OTC or via the NZDX are traded/quoted/priced at a 'margin over swap' (wholesale investors) or at the 'outright yield to maturity' (retail investors). A benefit of trading bonds based on yield rather than price is it allows an investor to compare potential % returns without the impact of accrued interest affecting ones judgement.
It's fair to say that most bonds traded in NZ have a par value of $1.00 meaning if you buy 25,000 bonds for example at any stage of the bonds life, that would be the principal value that the holder on maturity would receive, $25,000. I'm ignoring inflation linked bonds in this discussion.
As an example, you buy 25,000 bonds of a company at par during the initial issuance. Your outlay is therefore $25,000. These bonds have a 5 year term, semi annual coupon frequency and a coupon rate of 7.00%. The registry will say that you hold 25,000 XYZ010 7.00% bonds. You hold them for 1 year, collect 2 after tax interest payments and then decide to offer them up for sale.
As you're selling on the secondary market, the currently traded yield could be higher than, lower than, or the same as the coupon rate (7.00%) depending on how the market views the underlying company's future as well as macro risks at the time. These macro risks are usually influenced by the ocr, swap rates, geo political issues etc. Let's say the current traded yield is either 6.00% (premium) or 8.00% (discount) at the moment - for simplicity sake both of these yields are 1.00% away from the coupon rate of 7.00%.

A quick back of the envelope way to calculate the rough value difference of your bond is to take the quantity held, multiply it by the term remaining in years, multiply it by the difference between coupon and traded yield. In both cases above that would mean 25,000 * 4yrs * 0.01 = $1,000.

If the bond is trading at a premium say 6.00% then the bonds rough value is $25,000 + $1,000 so $26,000.
If the bond is trading at a discount say 8.00% then the bonds rough value is $25,000 - $1,000 so $24,000.
If the bond is trading around its coupon rate of 7.00% then the bonds rough value is par, $25,000.

So aim of bond trading yield based instruments is to buy high and sell low and bond trading of price based instruments is to buy low and sell high.

Hope this makes sense. That'll be $250 thanks! Cheers.

[Nor]

The question might be pointless if you held a bond from issue to maturity - yes. But the question might be important if you did not buy a bond at issue and subsequently sold it, or held it to maturity. As bonds are regarded as a 'scheme of arrangement' by the IRD, and net proceeds, including capital gains, are taxable, the total interest earned previously may decrease your capital gain tax liability once you exit the bond. Capital gain in a scheme of arrangement includes any associated interest payments.

The capital tax liability of bonds does not depend on whether you are an 'bond investor' or 'bond trader'.

SNOOPY

No matter when you bought it if you declare all the interest you receive each year as you receive it it's pointless to have to add it all on just to subtract it off again.
However when you buy a bond you often have to pay for accrued interest which is included in the price but just passed on to the seller. So when the first interest payment is made to you IRD says you got it but you didn't really get all or even any of it. Maybe some people adjust for this and so need some sort of resolution on selling.

"The capital tax liability of bonds does not depend on whether you are an 'bond investor' or 'bond trader'."
True. But what if its a capital loss? As it's written you include it as Other Income whether it's a gain or a loss. Seems unusual to me that a 'bond investor' could claim a loss whereas a 'share investor' can't.

[Snoopy]

"The capital tax liability of bonds does not depend on whether you are an 'bond investor' or 'bond trader'."
True. But what if its a capital loss? As it's written you include it as Other Income whether it's a gain or a loss. Seems unusual to me that a 'bond investor' could claim a loss whereas a 'share investor' can't.

Unusual or not, I believe claiming a capital loss on bonds is how it works, due to their 'scheme of arrangement' status. However, I am not sure if you are claiming a 'scheme of arrangement' loss that it can be cashed up. It may just be offset against future 'scheme of arrangement' gains. All this stuff has put me off buying bonds on the market, so I do not speak from experience. Oh for the good old days of just declaring the interest you were paid!

SNOOPY

[Snoopy]

No matter when you bought it if you declare all the interest you receive each year as you receive it, it's pointless to have to add it all on just to subtract it off again.

In most circumstances I would agree with you. But what would happen if there was a change in your tax bracket over the year that meant you were owed a tax refund? That would not be reflected in your declared income statement from the bond issuer. So you would have to make such an adjustment outside of the tax you were recorded as paying by the bond issuer.

SNOOPY

[Nor]

Wksha now 9.81% if you can get them for $1.
Way back when they issued they were 9.8%, IIRR. Including imputation credits.

[NZSilver]

Hi guys, thanks for all the info above, much appreciated, for my learning I was looking at the infratil bond offer.

Can someone please explain how these numbers work? and how these all interact to get a final interest rate for the bond?

Minimum Interest Rate: 7.05% per annum.

Issue Margin: The Issue Margin will be determined by Infratil in consultation with the Joint LeadManagers (identified on page 10) on the Rate Set Date following completion of thebookbuild process for the Firm Offer and will be announced via NZX and available onInfratil's website www.infratil.com/for-investors/our-bonds shortly thereafter.

Indicative Issue Margin: The indicative Issue Margin range is 2.40% to 2.55% per annum. The actual Issue Marginmay be above, within or below the indicative range.

Base Rate: The mid-market rate for a New Zealand dollar interest rate swap of a term matching the periodfrom the Issue Date to the Maturity Date as determined by Infratil in consultationwith the Arranger (identified below) on the Rate Set Date in accordance with marketconvention with reference to Bloomberg page ICNZ4 (or any successor page), in each caseexpressed on a quarterly basis (and rounded to 2 decimal places, if necessary, with 0.005 beingrounded up).

[Grimy]

Not that this answers your question, but rate has been set at 7.08%

[NZSilver]

Thanks Grimy, still not sure what indicative issue margin means but I guess you really look at the minimum interest rate. 7+% is pretty good