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instrument through adjustments to the issue

December 31 of each calendar year. The ac-

methods include continuous compounding and

price for each accrual period.

crual periods are the 6-month periods ending on

monthly compounding (that is, simple interest

each of these dates. The daily OID for the first

within a month). Consult your tax advisor for

Figure the OID allocable to any accrual pe-

accrual period is figured as follows.

more information about making this computa-

riod as follows.

tion.

($86,235.17 x .12/2) – $5,000

1) Multiply the adjusted issue price at the be-

The OID for the final accrual period is the

181 days

ginning of the accrual period by a fraction.

difference between the amount payable at ma-

$174.11

The numerator of the fraction is the

turity (other than a payment of qualified stated

= $.96193

181

instrument’s yield to maturity and the de-

interest) and the adjusted issue price at the

nominator is the number of accrual periods

beginning of the final accrual period.

The adjusted issue price at the beginning of

per year. The yield must be stated appro-

the second accrual period is the issue price plus

priately taking into account the length of

Reduction for acquisition premium. If you

the OID previously includible in income

the particular accrual period.

bought the debt instrument at an acquisition

($86,235.17 + $174.11), or $86,409.28. The

premium, figure the OID includible in income by

2) Subtract from the result in (1) any qualified

daily OID for the second accrual period is figured

reducing the daily OID by the daily acquisition

stated interest allocable to the accrual pe-

as follows.

premium. To figure the daily acquisition pre-

riod.

mium, multiply the daily OID by the following

($86,409.28 x .12/2) – $5,000

fraction.

184 days

Accrual period. For debt instruments is-

•

sued after 1984 and before April 4, 1994, an

$184.56

The numerator is the acquisition premium.

= $1.00304

accrual period is each 6-month period that ends

184

•

The denominator is the total OID remain-

on the day that corresponds to the stated matur-

Since the first and second accrual periods

ing for the instrument after your purchase

ity date of the debt instrument or the date 6

coincide exactly with your tax year, you include

date.

months before that date. For example, a debt

in income for 2002 the OID allocable to the first

instrument maturing on March 31 has accrual

two accrual periods, $174.11 ($.96193 × 181

periods that end on September 30 and March 31

Example 17. Assume the same facts as in

days) plus $184.56 ($1.00304 × 184 days), or

of each calendar year. Any short period is in-

Example 16, except that you bought the bond on

$358.67. Add the OID to the $10,000 interest

cluded as the first accrual period.

November 1, 2002, for $87,000, after its original

you report in 2002.

For debt instruments issued after April 3,

issue on May 1, 2002. The adjusted issue price

1994, accrual periods may be of any length and

on November 1, 2002, is $86,409.28

Example 16. Assume the same facts as in

may vary in length over the term of the instru-

($86,235.17 + $174.11). In this case, you paid

Example 15, except that you bought the bond at

an acquisition premium of $590.72 ($87,000 −

ment, as long as each accrual period is no

original issue on May 1, 2002. Also, the interest

longer than 1 year and all payments are made

$86,409.28). The daily OID for the accrual pe-

payment dates are October 31 and April 30 of

on the first or last day of an accrual period.

riod November 1, 2002, through April 30, 2003,

each calendar year. The accrual periods are the

However, the OID listed for these debt instru-

reduced for the acquisition premium, is figured

6-month periods ending on each of these dates.

ments in Section I – B has been figured using

as follows.

The daily OID for the first accrual period

6-month accrual periods.

(May 1, 2002 – October 31, 2002) is figured as

1) Daily OID on date of purchase

Daily OID. The OID for any accrual period is

follows.

(2nd accrual period) . . . . . . . . .

$1.01967*

allocated equally to each day in the accrual

period. Figure the amount to include in income

($86,235.17 x .12/2) – $5,000

2) Acquisition premium

$ 590.72

184 days

by adding the OID for each day you hold the

3) Total OID remaining

debt instrument during the year. Since your tax

$174.11

= $.94625

after purchase date

year will usually include parts of two or more

184

($13,764.83 −

accrual periods, you must include the proper

$174.11) . . . . . . . . .

13,590.72

The daily OID for the second accrual period

daily OID for each accrual period. If your debt

4) Line 2 ÷ line 3 . . . . . . . . . . . . .

.04346

instrument has 6-month accrual periods, your

(November 1, 2002 – April 30, 2003) is figured

as follows.

5) Line 1 × line 4 . . . . . . . . . . . . .

tax year will usually include one full 6-month

.04431

accrual period and parts of two other 6-month

($86,409.28 x .12/2) – $5,000

6) Daily OID reduced for the

periods.

181 days

acquisition premium. Line 1 −

Figuring daily OID. The daily OID for the

line 5 . . . . . . . . . . . . . . . . . . .

$0.97536

$184.56

initial accrual period is figured using the fol-

= $1.01967

181

* As shown in Example 16.

lowing formula.

If you hold the bond through the end of 2002,

(ip × ytm/n) − qsi

The total OID to include in income for 2002 is

you must include $236.31 of OID in income. This

$59.50 ($.97536 × 61 days).

is $174.11 ($.94625 × 184 days) for the period

May 1 through October 31 plus $62.20

ip = issue price

($1.01967 × 61 days) for the period November 1

Contingent Payment

ytm = yield to maturity

through December 31. The OID is added to the

Debt Instruments

$5,000 interest income paid on October 31,

n = number of accrual periods in 1 year

2002. Your basis in the bond is increased by the

This discussion shows how to figure OID on a

qsi = qualified stated interest

OID you include in income. On January 1, 2003,

contingent payment debt instrument issued after

your basis in the A Corporation bond is

p = number of days in accrual period

August 12, 1996, that was issued for cash or

$86,471.48 ($86,235.17 + $236.31).

publicly traded property. In general, a contin-

gent payment debt instrument is a debt instru-

Short first accrual period. You may have

The daily OID for subsequent accrual peri-

ment that provides for one or more payments

ods is figured the same way except the adjusted

to make adjustments if a debt instrument has a

that are contingent as to timing or amount. If you

short first accrual period. For example, a debt

issue price at the beginning of each period is

hold a contingent payment debt instrument, you

used in the formula instead of the issue price.

instrument with 6-month accrual periods that is

must report OID as it accrues each year.

issued on February 15 and matures on October

Example 15. On January 1, 2002, you

31 has a short first accrual period that ends April

Because the actual payments on a contin-

bought a 15-year, 10% bond of A Corporation at

30. (The remaining accrual periods begin on

gent payment debt instrument cannot be known

original issue for $86,235.17. According to the

May 1 or November 1.) For this short period,

in advance, issuers and holders cannot use the

prospectus, the bond matures on December 31,

figure the daily OID as described earlier, but

constant yield method (discussed earlier under

2016, at a stated redemption price of $100,000.

adjust the yield for the length of the short accrual

Debt Instruments Issued After 1984) without

The yield to maturity is 12%, compounded semi-

period. You may use any reasonable com-

making certain assumptions about the pay-

annually. The bond provides for qualified stated

pounding method in determining OID for a short

ments on the debt instrument. To figure OID

interest payments of $5,000 on June 30 and

period. Examples of reasonable compounding

accruals on contingent payment debt instru-

Page 10

Publication 1212 - List Of Original Issue Discount Instruments - Department Of Treasury - 2002 Page 10

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