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debt instruments. Petitioner financed approximately 10 percent
of its mortgage purchases through the issuance of long-term
debt.3
I. Favorable Financing Intangible Assets
At the close of business on December 31, 1984, petitioner
had outstanding long-term indebtedness on a number of debt
instruments. The effective contract interest rates4 on some of
these outstanding long-term debt obligations were below the
interest rates that petitioner would have incurred on January 1,
1985, had it issued comparable debt instruments in the market for
the remaining term of the particular debt instrument.
Petitioner’s favorable financing intangible assets consisted of
the benefits it derived from financing arrangements that required
it to pay interest at rates below those prevailing in the
financial markets as of January 1, 1985.
As of January 1, 1985, petitioner had the following 30
outstanding long-term debt instruments, which had below-market
interest rates and market prices that were lower than the
adjusted issue prices.
3 In this context, debt includes collateralized mortgage
obligations (CMOs) and guaranteed mortgage certificates (GMCs).
4 The effective contract interest rate is the adjusted
coupon interest rate (or for zero-coupon bonds, the adjusted
effective interest rate). The adjusted coupon interest rate
equals the sum of the coupon rate of interest, the hedging gain
or loss percentage, and any discount from the face value when the
debt obligation was issued.
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