The market discount can be defined as the discount offered on the bonds in secondary market. Market discount is actually the difference between the stated redemption price of the bond and the purchased price of the bond that is actually offered in the secondary market. The market discount is the difference if the bond is purchased at the price that is less than the par value of the bond. The market discount on a bond occurs when the par value or the purchase price of the bond in the market value decreases and the reason behind this decrease in the par value is due to the increase in the interest rate associated with the bond. However there is a difference between the market discount on ordinary bonds and the bonds that have original issue discounted securities for example zero coupon bonds where the market discount is referred to the difference between the purchase price and the issue price including the originally issued discount.
Market discount is not subject to tax deduction annually however it is taxed in the year when the bond is redeemed or sold in the same way as any other ordinary income is taxed. Bond holder is allowed to include the amortized market discount on the bond however this means that bond holder is paying the tax on the bond at present that he or she is going to pay in near future. One thing must be kept in mind that the discounted market discount is taxable even if the ordinary income related to market discount is tax exempted as in the case of municipal securities.
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