Yield on an issue of bonds (1.148-4)

November 23, 2014

General Matters

The yield on a fixed yield issue is the discount rate that, when used in computing the present value as of the issue date of all unconditionally payable payments of principal, interest, and fees for qualified guarantees on the issue and amounts reasonably expected to be paid as fees for qualified guarantees on the issue, produces an amount equal to the present value, using the same discount rate, of the aggregate issue price of bonds of the issue as of the issue date. Further, payments include certain amounts properly allocable to a qualified hedge. Yield on a fixed yield issue is computed as of the issue date and is not affected by subsequent unexpected events, except to the extent provided in paragraphs (b)(4) and (h)(3) of this section.

For fixed yield bonds subject to mandatory sinking fund redemptions, the yield on the issue is computed using the value of those bonds on the redemption date (not their stated principal amount) plus accrued and unpaid interest.  This rule is written to require the valuation of heavily discounted term bonds at the lower, accreted value, not the par value.  It is okay to use the stated principal amount as long as the difference between the stated principal amount and the issue price of the bond is not more than the product of 0.25% per year (times) the stated redemption price at maturity (times) the number of years to the weighted average maturity of the expected mandatory sinking fund schedule.  Treas. Reg. 1.148-4(b)(2)(ii).  “Stated redemption price” for this purpose means the total redemption price of the bond – which includes any call premiums.

Certain bonds subject to optional early redemption must be treated as redeemed at their stated redemption prices on the optional redemption dates that would produce the lowest yield on the issue.  For example, this applies to premium bonds whe the premium is more than the product of 0.25% (times) the stated redemption price of the bonds at maturity (times) the number of complete years to the first optional redemption date for the bonds.  This also applies to stepped coupon bonds when the bonds bear interest at increasing interest rates.  Treas. Reg. 1.148-4(b)(3).

For purposes of computing yield on a variable yield issue, up-front and non-level payments for a qualified guarantee must be allocated to each computation period.  The 1993 final regulations have a safe harbor for the allocation of non-level payments if an equal amount is treated as paid as of the first day of each bond year over the term of the qualified guarantee.  If a guaranteed variable yield bonds is redeemed prior to maturity, qualified guarantee payments otherwise allocable to the period after redemption are to be allocated to remaining outstanding bonds of the issue or, if none remain outstanding, to the computation period before such redemption.  See Treas. Reg. 1.148-4(f)(6)(ii).

PLR 200403095 (Sept. 30, 2003):  Corporation may calculate a single yield on the Organization 1 Bonds and may calculate a single yield on the Organization 2 Bonds on behalf of Subsidiary 1 and Subsidiary 2, respectively.  Organization 1 and Organization 2 were each established as nonprofit corporations under 501(c)(3) and operated as a qualified scholarship funding corporation.  Treas. Reg. 1.148-4(a) provides that the Commissioner may permit issuers of qualified mortgage bonds and qualified student loan bonds to use a single yield for two or more issues.  Corporation, through a series of transactions, had acquired 100 percent of the stock of both Subsidiaries.