Suppose you purchased a corporate bond with 10-year maturity, $1,000 face value, 10% coupon rate, and semiannual interest payments. What all this means is, you receive $50 interest payment at the end of each six-month period for 10 years (20 times). Then, when the bond matures, you will receive the principal amount (the face value) in a lump sum. Three years after the bonds were purchased, the going rate of interest (coupon rate) on new bonds fell to 6% (or 6% compounded semiannually).
From a tax perspective, the interest you receive from the bond is generally considered taxable income. This means that every six months, when you receive the $50 interest payment, you would need to report this as income on your tax return. Over the course of a year, this would total $100 in taxable income per bond. If you sell the bond before it matures, and you sell it for more than you paid for it because the interest rate has fallen, you may also have to pay capital gains tax on the profit you made from the sale. The rate of capital gains tax you pay depends on your overall income and how long you held the bond. However, if you hold the bond until maturity, you simply get back the face value of the bond ($1,000). This is not considered a capital gain, so it's not taxable. Remember, tax laws can be complex and may change, so it's always a good idea to consult with a tax professional or advisor to understand your specific situation.
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