Fixed Income Fundamentals: Trustees, Payments, and Tax Considerations

​A trustee ensures timely payments through some of the following methods:

• Supranational organization can call on its members to provide funds;
• Sovereign bonds are backed by the “full faith and credit” of the national government (through taxes and printing money);
• Sources for non-sovereign government debt includes (a) general taxing authorities or special funding taxes and (b) cash flows of a project bond;
• Corporate bonds source are the cash flows generated from a company’s operation;
• Securitizations rely on cash flows generated by underlying financial assets.

Tax Consideration 
Income portion of a bond investment is taxed at the ordinary income tax rate, and is the most likely type of tax for coupon payments. A bond investment may also generate capital gain/loss, therefore, if a bond is sold before its maturity date, the price is likely to have changed compared to the purchase price. 

​For bonds issued at a discount, additional tax consideration is related to the tax status of the original issue discount. The original issue discount is Par Value – the original issue price.  Additionally, some jurisdictions have tax provisions for bonds bought at a premium. They allow investors to deduct a prorated portion of the amount paid in excess of the bond’s par value, from their taxable income every tax year, until maturity.