An investor purchases a 15 year, $1000 par Treasury bond for 85. At the end of 13 years, the investor sells the bond at 98. If they do not accrete the bond, what are the tax consequences that year?
In the explanation they explain after 13 years, the bond’s cost basis is $980, that I get because it’s given. The explanation also says the sales proceeds are $980. Are the cost basis and sales proceeds different here? There is no capital gain or loss (breakeven), but how are we ending up with another $980 to cancel it out?
Also, please confirm to determine the annualized discount($10 = $150 over 15 years), the $150 is the difference between par ($1000) & $85, $850, correct?
The bond was bought at a discount of 15, i.e. 85. It’s a coincidence that this matches up with the bond’s 15-year maturity; that makes the annualized discount work out nicely at $10 (1%) per year. The cost basis is stepped up every year; 13 years means the cost basis is now 85+13=98, i.e. the bond is effectively valued at $980. This is what the investor sells it for, so there is no capital gain or loss.
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Yes, that’s exactly right. The total discount is applied to the cost basis at an equal rate per year. In this question, it is 15% over 15 years, so each year the cost basis is increased by 1%.
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