Accretion Question


I’m not sure how we arrived at $900 for the bond’s cost basis.

Thank you for any insight.

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Sure, happy to explain more.

An investor purchases a 12 year, $1,000 par, 7% Treasury bond for 76.

This bond is trading at 76, i.e. at a discount of 100-76=24. Since it is a 12-year bond, the annualized discount is 24/12=2.

At the end of 7 years, the investor sells the bond at 87.

The annualized discount is added to the cost basis every year. After 7 years, this means the cost basis will rise by 7*2=14, so the new cost basis is 76+14=90.

Please let me know if I can clarify further!

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