Amortization of Premium and Accretion of Discount

What this video covers

• Why premium amortization on a tax-exempt municipal bond is mandatory, not optional, and why the amortized amount is NOT tax-deductible
• How straight-line amortization walks the cost basis down to par (premium divided by years to maturity) so there is no capital loss at maturity
• How original issue discount (OID) accretion walks the basis up to par, and why that phantom growth on a muni is treated as tax-free interest
• The critical distinction between OID (tax-free) and secondary market discount (taxable as ordinary income) on municipal bonds
• Why you must use the adjusted (amortized or accreted) basis, not the original purchase price, to calculate gain or loss on an early sale
• How maturity length and coupon size drive bond price sensitivity, and why zero-coupon bonds have the highest volatility for a given maturity
• The "pull to par" effect as a bond approaches its redemption date