When a bond matures, the issuer pays you back the bond’s face value (par) and sends the last interest payment, and the bond stops existing as an investment. For most corporate bonds par is $1,000; for most municipal bonds it’s $5,000.1MSRB. Municipal Bond Basics What you owe in tax on that final payout depends on the type of bond, what you originally paid for it, and whether you’ve been reporting interest along the way.
What You Get Paid
You receive par regardless of what you paid. Buy a $1,000 corporate bond on the secondary market for $950 and hold it to maturity, you still get $1,000 back. Pay $1,050 for it, you still get $1,000. Par is fixed at issuance and doesn’t move with inflation, interest rates, or the bond’s trading price during its life.
Alongside the principal, you get one last coupon covering interest accrued from the previous payment date through the maturity date. On a 5% bond with a $1,000 par value and semiannual coupons, that’s $25 if the final period was a full six months. After that, the bond earns nothing. Leaving the proceeds parked in your brokerage account doesn’t extend the yield, and if you’re sitting on a paper certificate, delaying redemption doesn’t earn extra interest either.
How the Money Reaches You
Almost all bonds today are held electronically. A paying agent, usually a large commercial bank, distributes principal and final interest through the Depository Trust Company, which credits your broker, who credits your account.2DTCC. Understanding the DTCC Subsidiaries Settlement Process The cash typically appears within a few business days of the maturity date.
If you’re holding a physical paper certificate, you have to surrender it to the paying agent, who verifies ownership before releasing the money. Lost the certificate? You’ll need to post an indemnity bond covering roughly 2% to 3% of the bond’s value while a replacement is processed.
Tax on the Final Interest Payment
The IRS treats bond interest as ordinary income, taxed at your regular federal rate. For 2026, the top marginal rate is 37%, which kicks in above $640,600 for single filers and $768,700 for joint filers.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Your broker reports the interest on Form 1099-INT, and the IRS already has that number when you file. If you leave it off your return and the IRS finds negligence or a substantial understatement, the accuracy-related penalty is 20% of the underpaid tax.4Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Tax When You Paid Less or More Than Par
If you bought the bond on the secondary market below par, the gap between your purchase price and the par value you receive at maturity is generally a capital gain. Held longer than a year, it qualifies for long-term capital gains rates, which for 2026 are 0%, 15%, or 20% depending on income.5Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses Your broker reports the proceeds on Form 1099-B.
If you paid more than par (a premium), you had two options for taxable bonds. You could elect to amortize the premium over the life of the bond, which reduces your taxable interest each year and lowers your cost basis correspondingly.6eCFR. 26 CFR 1.171-4 – Election to Amortize Bond Premium on Taxable Bonds With that election, your basis at maturity is roughly par, and there’s no capital loss to claim. If you didn’t amortize, your full purchase price stays your basis, and the difference between that and par becomes a capital loss when the bond pays out. The election, once made, applies to all your taxable bonds and can only be revoked with IRS approval.
Zero-Coupon and Original Issue Discount Bonds
Zero-coupon bonds pay no interest during their life. You buy them at a steep discount and get par at maturity. The IRS doesn’t let you defer the income until then. Each year you owe tax on the “imputed” or “phantom” interest, the amount the bond is treated as having earned as it grows toward par, and it’s taxed as ordinary income even though no cash changed hands.
The annual inclusion increases your cost basis, so by maturity your adjusted basis should be at or near par, leaving little or no additional gain to report.7Internal Revenue Service. Guide to Original Issue Discount (OID) Instruments OID income is reported on Form 1099-OID rather than Form 1099-INT.8Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID The same framework applies to any bond originally issued at a discount that qualifies as OID under IRS rules.
Municipal and Treasury Bonds
Interest on bonds issued by state and local governments is generally excluded from federal income tax.9Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds If you live in the state that issued the bond, the interest is often exempt from state tax as well. That exemption is in place for 2026.
U.S. Treasury interest works the other way: taxable federally, exempt from state and local income taxes under federal law.10Office of the Law Revision Counsel. 31 U.S. Code 3124 – Exemption From Taxation Brokers don’t usually flag the exempt portion on your tax forms, so you’ll calculate that yourself on your state return.
One boundary worth noting: the exemption covers interest only. If you bought a muni or a Treasury at a discount and receive par at maturity, the capital gain portion is still taxable at the federal level.
U.S. Savings Bonds
Savings bonds run on different rules, and this is where costly mistakes tend to happen. Series EE and Series I bonds earn interest for 30 years and then stop. A bond issued in 1996 reached final maturity in 2026 and is no longer growing.11TreasuryDirect. EE Bonds
Electronic EE bonds held through TreasuryDirect are redeemed automatically at maturity. Paper bonds are not. If you’ve got paper savings bonds in a drawer past the 30-year mark, they aren’t earning anything, and holding them just postpones a tax bill you already owe.
Most people defer reporting savings bond interest until the bond is cashed or stops earning interest. Under that approach, the entire accumulated interest becomes taxable in the year of maturity, which can be a large hit if several bonds mature together. Reporting the interest annually is an option, but few people choose it.12TreasuryDirect. Comparing EE and I Bonds Like Treasuries, savings bond interest is exempt from state and local income tax.
When Maturity Comes Early
Some bonds pay off before their stated maturity date. A callable bond gives the issuer the right to repay early, usually after a set number of years, and issuers call bonds when interest rates drop so they can refinance cheaper. You get your principal back, sometimes with a small premium above par, but you lose the higher coupons you were counting on. Bond agreements typically require at least 10 calendar days’ notice before a call redemption, and many specify 30 days or more. The call price and schedule sit in the bond’s prospectus from the start.
Long-term municipal bonds sometimes carry a sinking fund provision that forces the issuer to retire portions of the debt on a schedule, redeeming bonds at par. Bonds selected for early redemption are chosen at random, so your principal can come back years earlier than expected. The redemption schedule is set at pricing and disclosed in the offering documents.
Taxwise, an early call is treated the same as maturity. You receive the call price, owe tax on the final interest, and figure any capital gain or loss against your adjusted basis.
If the Issuer Doesn’t Pay
Sometimes the maturity date arrives and the money doesn’t. Nonpayment is a default, and what follows depends on the issuer and the bond’s structure.
For corporate bonds, secured bondholders have a claim on pledged collateral. Unsecured bondholders share what’s left proportionally, after secured creditors and priority claims are paid. In bankruptcy, senior bondholders recover before subordinated bondholders; shareholders come last. Recovery rates vary widely by industry, seniority, and whether the company reorganizes or liquidates.
Municipal defaults are rarer and tend to drag on. Recovery can come through catch-up payments after the issuer stabilizes, sales of project assets pledged to the bonds, restructured replacement bonds, or litigation settlements, and resolution sometimes takes a decade or more. General obligation bonds typically recover more than bonds tied to a single revenue project. If a bond you hold is approaching maturity and the issuer’s credit has weakened, credit rating downgrades and missed interest payments are the clearest signals that the payoff is at risk.
Reinvesting What You Got Back
Getting your principal back feels like a win until you try to put it back to work at the same yield. If rates have dropped since you bought in, a bond that paid 5% may now be replaceable only with something paying 3%, and the same principal generates meaningfully less income. Parking the proceeds in a money market fund while you decide is reasonable, but letting cash sit indefinitely in a settlement account defeats the purpose of holding bonds in the first place.