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How to enter bond income that includes "principal"?

adslimq2

Hi all. I'm in Australia, using Quicken (Reckon) Home & Business 2013.
I have only just realised that some of my bond income transactions include a "principal" component. It seems that this represents a partial payback of the original bond, since the reported value of those bonds is dropping.
How should I record that principal component, so that it also changes my holding? I don't see any change in "Face Value", but there are notations of "Bond Factors" that mean nothing to me.
Thanks!

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Rocket J Squirrel

adslimq2 said:

The problem is it that my bond holding report from the broker shows that the Current Face Value has fallen - which I assume represents the reduction of Holdings? I have updated the Security Price in Quicken. Quicken still shows the same Market Value as originally entered, even though I assume it should have reduced by the capital return.

I have recently observed behavior I can't explain using the Return of Capital transaction.

It's been some time since I had a real-life security (unit investment trust) which periodically returned capital (with downloaded RoC transactions from my brokerage). Each time it did, my Market Value decreased, as expected. The Market Value graph in the Security Detail View looked like a staircase descending to the right.

Now, if I enter Return of Capital transactions using a fake security in a test file, I find that the market value is not decreasing and the graph is not declining. I don't know whether I'm doing something wrong, whether there's a recent bug in the RoC transaction, or whether Quicken is smarter than I am and knows a fake security (meaning one that can't throw off RoCs) when it sees one because it's not getting a reduction in value from a broker.

That's why I suggested using Sell transactions instead of RoC. I can't manually get RoC to exhibit the behavior I've seen in the past from downloaded transactions.

All comments

Rocket J Squirrel

I know nothing about Reckon. But if you are getting back some principal and the market value is dropping accordingly, you can simply enter a Sell transaction for the amount in question.

Frankx

HI @adslimq2,

It seems to me that you would need to report the reduction in the "principal" portion of the bond "value" regardless of whether there is a decrease in the "face amount/value".

Effectively it is a "return of capital" and (at least under US tax principles) is non-taxable.

Frankx

q_lurker

In US tax policy, IF you paid a premium for a bond (something over the face value at maturity), you may be allowed to consider part of the interest received as an amortized bond premium.

For me I then treat that as three transactions
1) An IntInc transaction for full face value of the interest payment received
2) A RtrnCap transaction that reduces my basis in the bond
3) A MiscExp transaction that 'spends' that RtrnCap amount and is categorized to the applicable interest income category (typically _IntIncTaxFree for a municipal bond.

Cash-wise, the second and third transactions counteract each other -- no net change in cash. The financial institution provides the data for the RtrnCap/MiscExp amount.

Bottom line, if you are getting some of your principle back, it is likely a RtrnCap transaction is in order.

adslimq2

Thanks!

I hadn't seen the "Return of Capital" option - but that's exactly what I needed.

Fortunately, since this is my SMSF and I am exceedingly old, we don't get taxed on any of this in Australia.

All the best.

Frankx

HI @adslimq2,

Inform me - is an "SMSF" in any way related to a Superannuation Fund?? I am reaching a bit into my memory here...

Frankx

adslimq2

Sorry - Self Managed Superannuation Fund.

Frankx

Ah-ha!!!! I didn't recognized the "self-managed" part but I am VERY familiar with superannuation funds! Spent a bunch of time in Australia and loved every minute of it!
Hope you haven't been enduring the covid issues relative to Melbourne recently and hope that all is good for you & yours going forward!

Frankx

adslimq2

Thanks, Frankx. Fortunately we are in Brisbane, so very safe. I hope you all are!

However, I seem to still have a problem with this. Entering income as a Coupon payment and a separate Return of Capital does not change the Market Value and increases the Cost Basis!

I can't "Sell" some, as I don't know price or number.

adslimq2

Sorry! Should have said it reduces the Cost Basis.

q_lurker

If you are getting back some of the principal, why wouldn't that reduce your basis?

Market Value is a different animal, unrelated to your basis or principal value.

adslimq2

I'm in uncharted waters here, as I don't really understand what is happening, even though I've used Quicken for ~20 years.

The problem is it that my bond holding report from the broker shows that the Current Face Value has fallen - which I assume represents the reduction of Holdings? I have updated the Security Price in Quicken. Quicken still shows the same Market Value as originally entered, even though I assume it should have reduced by the capital return.

Please tell me if I am making incorrect assumptions!

Rocket J Squirrel

adslimq2 said:

The problem is it that my bond holding report from the broker shows that the Current Face Value has fallen - which I assume represents the reduction of Holdings? I have updated the Security Price in Quicken. Quicken still shows the same Market Value as originally entered, even though I assume it should have reduced by the capital return.

I have recently observed behavior I can't explain using the Return of Capital transaction.

That's why I suggested using Sell transactions instead of RoC. I can't manually get RoC to exhibit the behavior I've seen in the past from downloaded transactions.

adslimq2

Thanks, I'll try the Sell option. It doesn't need to be exact, but it sounds like it will be a reasonable hack.

Cheers all!

adslimq2

The Sell transactions worked close enough. Thanks, again.

q_lurker

@Rocket J Squirrel

The only way that makes sense is the the current price dropped at the same time in the same (or similar) amount. Market value is price times shares. No other transactions or transaction history involved.

Now it makes sense in the real world that as a security pays back some of its value, the price also drops. This happens when a security goes ex-div, but then it is usually a rather small amount and can be lost in the other day-to-day variations. With a more significant payout on an investment that intends to make such payouts, price will drop because the remaining holding is worth less than before the payout.

For your fake security, you would need to be adjusting the price along with each RtrnCap distribution.

@adslimq2 -- if the sells work for you, go for it..

Toolworker

FWIW - I just got a return of capital on a bond. I entered it as RtrnCap and the cost basis of the position went down by that amount.