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For a stripped bond or coupon acquired after

Example 24. Assume the same facts as in

r = number of days from purchase to

Example 23, and that you held the coupon for

April 3, 1994, accrual periods may be of any

end of short accrual period

the rest of 2002.

length and may vary in length over the term of

s = number of days in accrual period

the instrument, as long as each accrual period is

For the short initial accrual period from May

ending on last day of short accrual

no longer than 1 year and all payments are

31, 2002, through August 12, 2002, the daily

period

OID is figured using Formula 2, as follows.

made on the first or last day of an accrual period.

m = number of full accrual periods from

purchase to maturity

Yield to maturity (YTM). In general, the YTM

181

of a stripped bond or coupon is the discount rate

$60,000 × (1 + .08406/2)

− $60,000

that, when used in figuring the present value of

Example 23. On May 31, 2002, you bought

all principal and interest payments, produces an

a coupon stripped from a U.S. Treasury bond

amount equal to the acquisition price.

$1,018.48

through the Department of the Treasury’s

= $13.76327

STRIPS program for $60,000. $100,000 is pay-

Figuring YTM. How you figure the YTM for

able on the coupon’s due date, August 12, 2008.

The OID for this period is $1,018.48

a stripped bond or coupon purchased after 1984

($13.76327 × 74 days).

You decide to figure OID using 6-month accrual

depends on whether you have equal accrual

periods. There are 12 full 6-month accrual peri-

For the second accrual period from August

periods or a short initial accrual period.

13, 2002, through February 12, 2003, the ad-

ods and a 74-day short initial accrual period from

1) Equal accrual periods. If the period from

justed acquisition price is $61,018.48. This is the

the purchase date to the coupon’s due date. The

the date you purchased a stripped bond or cou-

original $60,000 acquisition price plus

YTM on this stripped coupon is figured as fol-

pon to the maturity date can be divided evenly

$1,018.48 OID for the short initial accrual period.

lows.

into full accrual periods without including a

The daily OID is figured using Formula 1, as

(

)

shorter period, you can figure the YTM by using

follows.

+ 12

(74/181)

the following formula.

(

)

2 ×

$61,018.48 × (.08406/2)

($100,000 / $60,000)

-1

= 2 × (1.04203 -1) = .08406 = 8.406%

(

)

184

(

)

srp

– 1

$2,564.60671

Use 8.406% YTM to figure the OID for each

= $13. 93808

184

accrual period or partial accrual period for which

you must report OID.

The OID for the part of this period included in

n = number of accrual periods in 1 year

2002 (August 13 – December 31) is $1,965.27

($13.93808 × 141 days).

srp = stated redemption price at maturity

Daily OID. The OID for any accrual period is

The OID to be reported on your 2002 tax

allocated equally to each day in the accrual

ap = acquisition price

return is $2,983.75 ($1,018.48 + $1,965.27).

period. You must include in income the sum of

m = number of full accrual periods from

Final accrual period. The OID for the final

the daily OID amounts for each day you hold the

purchase to maturity

accrual period for a stripped bond or coupon is

debt instrument during the year. Since your tax

the amount payable at maturity of the stripped

year will usually include parts of two or more

If the instrument is a stripped coupon, the

bond (or interest payable on the stripped cou-

accrual periods, you must include the proper

stated redemption price is the amount payable

pon) minus the adjusted acquisition price at the

daily OID amounts for each accrual period.

on the due date of the coupon.

beginning of the final accrual period. The daily

Figuring daily OID. For the initial accrual

OID for the final accrual period is figured by

Example 22. On May 15, 1991, you bought

period of a stripped bond or coupon acquired

dividing the OID for the period by the number of

a coupon stripped from a U.S. Treasury bond

after 1984, figure the daily OID using Formula 1,

days in the period.

through the Department of the Treasury’s

next, if there are equal accrual periods. Use

STRIPS program for $38,000. An amount of

Formula 2 if there is a short initial accrual period.

$100,000 is payable on the coupon’s due date,

For subsequent accrual periods, figure the

November 14, 2003. There are exactly 25

How To Get Tax Help

daily OID using Formula 1 (whether or not there

6-month periods between the purchase date,

was a short initial accrual period), but use the

May 15, 1991, and the coupon’s due date, No-

You can get help with unresolved tax issues,

adjusted acquisition price in the formula instead

vember 14, 2003. The YTM on this stripped

order free publications and forms, ask tax ques-

of the acquisition price.

coupon is figured as follows.

tions, and get more information from the IRS in

Formula 1 —

(

)

several ways. By selecting the method that is

(

$100,000

)

best for you, you will have quick and easy ac-

ap × ytm / n

– 1

$38,000

cess to tax help.

= 2 × (1.03946 -1) = 0.07892 = 7.892%

Formula 2 —

Contacting your Taxpayer Advocate. If you

Use 7.892% YTM to figure the OID for each

have attempted to deal with an IRS problem

accrual period or partial accrual period for which

unsuccessfully, you should contact your Tax-

you must report OID.

− ap

ap x (1 + ytm /n)

payer Advocate.

The Taxpayer Advocate represents your in-

2) Short initial accrual period. If the period

terests and concerns within the IRS by protect-

from the date you purchased a stripped bond or

ap = acquisition price

ing your rights and resolving problems that have

coupon to the date of its maturity cannot be

not been fixed through normal channels. While

ytm = yield to maturity

divided evenly into full accrual periods, so that a

Taxpayer Advocates cannot change the tax law

shorter period must be included, you can figure

n = number of accrual periods in 1 year

or make a technical tax decision, they can clear

the YTM by using the following formula (the

p = number of days in accrual period

up problems that resulted from previous con-

exact method).

tacts and ensure that your case is given a com-

r = number of days from purchase to

(

)

plete and impartial review.

end of short accrual period

+ m

To contact your Taxpayer Advocate:

(

)

( )

srp

s = number of days in accrual period

•

– 1

Call the Taxpayer Advocate at

ending on last day of short accrual

1 – 877 – 777 – 4778.

period

•

Call, write, or fax the Taxpayer Advocate

The rules for figuring OID on these instru-

n = number of accrual periods in 1 year

office in your area.

ments are similar to those illustrated in Example

srp = stated redemption price at maturity

•

15 and Example 16, earlier, under Debt Instru-

Call 1 – 800 – 829 – 4059 if you are a

ap = acquisition price

ments Issued After 1984.

TTY/TDD user.

Page 14

Publication 1212 - List Of Original Issue Discount Instruments - Department Of Treasury - 2002 Page 14

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