Indexed debt obligations issued after October 16, 1991

An indexed debt obligation is a debt obligation with terms or conditions that provide for an adjustment (determined by a change in the buying power of money) to the amount owing under the obligation for a period during which it was outstanding.

We treat as interest any increase or decrease in the amount owing under an indexed debt obligation relating to a change in the buying power of money.

If the buying power of money decreases, you have to treat as interest any additional amount the holder of the obligation received or was entitled to receive in the year.

If the buying power of money increases, treat the decrease in the amount owing under an indexed debt obligation as interest the debtor received or was entitled to receive in the year. In this situation, the holder of the obligation can deduct the amount paid to the debtor.