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

[Snoopy]

The next step is to find out what the 'Determination G1' referred to is.

I have not been able to find 'Determination G1' for good reason. It was replaced by document 'Determination G1A' as linked to below:

https://www.taxtechnical.ird.govt.nz...nation-g1a.pdf

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2. This determination requires that income derived or expenditure incurred in respect of a period shall be apportioned on a straight line basis among the income years in which the period falls, according to the number of days in the period calculated on either a 365 or a 360 day basis (we won't go into the 360 day year option here).

It assumes that income and expenditure accrue at a flat dollar rate over each day in the period.

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So putting this knowledge into practice:
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Our 'example bond' was bought on 12th March 1987 and the first interest payment on that bond to our new bond owner was made on 15th May 1987. That adds up to a period of 19+30+15= 64days between 'bond purchase' and 'first payment'. There are three half year periods subsequent to that over which interest is earned, before the bond finally matures on 15th November 1988. On that date, the final interest payment is made and the original capital is returned.

This means the total time over which our investors 'extra capital ' is returned is deemed to be: 64 + 1.5x 365= 612 days

We have already calculated the 'total income' that our bondholder is to receive for the whole investment period is to be $267,500 (refer post 1).

This amounts to $267,500/612= $437.09 per day.

The next step is to find out how this information relates to the tabulated information in 'Determination G3'.

SNOOPY