Zero coupon Bonds

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Sholly
Sholly Member ✭
edited October 2022 in Investing (Windows)
Quicken currently treats the difference in the purchase price of zero cpn Treasuries and the redemption price as Capital Gains; it is not. It is INTEREST INCOME. I presume Quicken similarly handles other discounted bond purchases/redemptions (and premium bond purchases/redemptions the same way? In this case it can be a combination of interest and capital gains/losses. Brokerage houses must follow the IRS guidelines in reporting this on YE 1099. Can Quicken do the same?

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  • Sholly
    Sholly Member ✭
    Answer ✓
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    Thank you for your response. So there is no way to enter this in ONE transaction? Quicken doesn't recognize Zero % Cpn bond. What if you enter the purchase price as the face value and put in the accrued interest paid as the interest to maturity (as a negative amount) equal to the difference of redemption amount minus purchase cost?

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  • J_Mike
    J_Mike SuperUser ✭✭✭✭✭
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    For background, zero coupon bonds are purchased at steep discount to face value. Interest is earned on the bond and is paid at maturity when the bond is reddened at face value.

    To record this in quicken requires 3 transactions;
    1)   An Interest Income transaction - for the amount of interest,
    2)  A negative Return Of Capital - negative the amount of interest earned.
    3]  a Sell transaction at face value.

    The interest is properly reported as taxable income.
    The Cost Basis is increased to face value.
    The net to cash of 1) & 2) is zero.
    The sale is at zero capital gains.

    In practice, the IRS does not wait 10-20 years until maturity to collect their "share" of the interest.
    The imputed interest is reported annually to the IRS and the bond holder should receive a 1099 report.
    In Quicken, the holder records the annual interest and and a corresponding negative ROC.

    Taxes on interest are paid annually.
    Cost Basis graduate;;y increases to face value.
    Again. the bet to cash for the year is zero.
    QWin & QMac (Deluxe) Subscription
    Quicken user since 1991

  • Sholly
    Sholly Member ✭
    Answer ✓
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    Thank you for your response. So there is no way to enter this in ONE transaction? Quicken doesn't recognize Zero % Cpn bond. What if you enter the purchase price as the face value and put in the accrued interest paid as the interest to maturity (as a negative amount) equal to the difference of redemption amount minus purchase cost?
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