(1) Scope.
This paragraph (b) contains rules that apply to both private security and private payments.
(2) Present value measurement --
(i) Use of present value.
In determining whether an issue meets the private security or payment test, the present value of the payments or property taken into account is compared to the present value of the debt service to be paid over the term of the issue.
(ii) Debt service --
(A) Debt service paid from proceeds.
Debt service does not include any amount paid or to be paid from sale proceeds or investment proceeds. For example, debt service does not include payments of capitalized interest funded with proceeds.
(B) Adjustments to debt service.
Debt service is adjusted to take into account payments and receipts that adjust the yield on an issue for purposes of section 148(f). For example, debt service includes fees paid for qualified guarantees under section 1.148-4(f) and is adjusted to take into account payments and receipts on qualified hedges under section 1.148-4(h).
(iii) Computation of present value --
(A) In general.
Present values are determined by using the yield on the issue as the discount rate and by discounting all amounts to the issue date. See, however, section 1.141-13 for special rules for refunding bonds.
(B) Fixed yield issues.
For a fixed yield issue, yield is determined on the issue date and is not adjusted to take into account subsequent events.
(C) Variable yield issues.
The yield on a variable yield issue is determined over the term of the issue. To determine the reasonably expected yield as of any date, the issuer may assume that the future interest rate on a variable yield bond will be the then-current interest rate on the bonds determined under the formula prescribed in the bond documents. A deliberate action requires a recomputation of the yield on the variable yield issue to determine the present value of payments under that arrangement. In that case, the issuer must use the yield determined as of the date of the deliberate action for purposes of determining the present value of payments under the arrangement causing the deliberate action. See paragraph (g) of this section, Example 3.
(iv) Application to private security.
For purposes of determining the present value of debt service that is secured by property, the property is valued at fair market value as of the first date on which the property secures bonds of the issue.