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Cost Basis for Bonds

Mediocre

Let's say I buy a 100 bonds for a total of $100,000 ($1000 per bond). Each month the bond pays a 10% return annualized, so after month 1 the investment is now worth $100,833 and the interest is compounded so obviously the monthly income amount increases each month. The cost basis should be $100,000 for this investment but the cost basis shows the same as the market value, which is the bond value plus the cash in interest (and the gain/loss always = 0). Why does Quicken do this instead of showing that the cost basis is always $100,000 and the gain would be any interest earned?

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q_lurker

Cost basis is a security level value, not an account level value. So if you record an interest payment going into the account that holds the bond security, the basis of the bond remains unchanged. You will also have cash in the account which separately carries its basis dollar for dollar.

If you record it as reinvested interest, you are buying additional “shares” of the bond which does increase the total basis of that security.

Most bonds do not actually “reinvest” interest. What sometimes takes place is that one buys the bond at a discount. The value of the bond increases as it accrues interest, but the proper treatment at maturity can be to sell the bond at cost and record the extra amount received as interest.

There are a wide variety of bonds types in the marketplace- I-bonds, treasury notes, bills, and bonds, muni’s, corporates, savings bonds, and others. Many need to be treated in Quicken with individual approaches.

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NotACPA

If you're reinvesting that interest, each reinvestment is a new/subsequent purchase of the security … which is why the cost basis PROPERLY increases.

If not reinvesting, how are you recording that return? What action in Q?

Mediocre

It doesn't matter whether I put it in as income (interest) or show it as reinvested income (interest and shares) the cost basis and market value remain the same. If you put $100 into a savings account and it got $4 interest in a year for a balance of $104 the cost basis shouldn't be 104 even though interest is being compounded. So on this bond I am receiving interest on the bond but my cost basis should only be the original investment not what I've earned through the investment. If that's not true then I guess I don't understand cost basis.

q_lurker

If you record it as reinvested interest, you are buying additional “shares” of the bond which does increase the total basis of that security.

Tom Young

"It doesn't matter whether I put it in as income (interest) or show it as reinvested income (interest and shares) the cost basis and market value remain the same."

That sentence, at least the first half, don't really makes sense. Using your example and doing the accounting as described in the first half of the sentence should result in a 100 bonds at a cost basis of $100,000, a market value of the bonds based on the "quote" (if there is one) plus $833.33 of cash. Accounting for the interest in that fashion certainly SHOULD NOT affect the cost basis of the bonds. Now for the ENTIRE ACCOUNT the cost basis would be $100,833.33 because the "cost basis" of the cash received is included in the total basis for the Account. Are you looking at the Account totals when you say "The cost basis should be $100,000 for this investment?" The Account totals include everything in the Account, including any cash.