How to Calculate Yield to Maturity between Interest Rate Dates

Amortization Advice for Treasury Bonds Purchased at a Premium or Discount

August A. Saibeni, MS, CPA (inactive)

It is well known that bond premiums or discounts occur when bonds are purchased for more or less than face value, respectively, and that bond premiums or discounts must be amortized to properly state effective interest expense for issuers and effective interest income for buyers. Of considerable interest to taxpayers is the ability to elect to amortize bond premiums under Treasury Regulations section 1.174-4 in order to reduce current reported interest income [Treasury Regulations section 1.174-2(a)]. To develop an accurate amortization table and calculate taxable interest, however, one must use an accurate yield to maturity (YTM). If a taxpayer does not elect to amortize premiums, the amount of the premium can be used to reduce gain or increase losses upon disposal of the bond or note. Accounting texts typically discuss amortizing bond premiums and discounts, but less frequently address how to calculate the YTM on bonds purchased between interest rate dates at a premium or discount. Examples shown in textbooks and IRS publications either provide the YTM or advise taxpayers to ask their brokers.