Premium & Discount Amortization

[steve at SFI]

How can I adjust the cost basis of fixed income investments for the amortization of a premium or discount?

[Mark]

Hi steve at SFI,

I'm not sure I follow the question... You can edit the cost basis of any transaction by editing the transaction. Open up the Data Register, select the investment, and choose the 'Investments (all)' data type, and you will see all your transactions. Select one, and edit it.

If that doesn't help, please give me some specifics of the situation, and what you want to modify.

[steve at SFI]

I was hoping to be able to add to the cost basis over time. Amortization occurs with each interest payment. I make the adjustments less frequently but at least annually. I wish I could add to the cost basis by date that way my cost basis at 12/31/08 will be different than my basis at 12/31/09. When I run reports for a specific date the cost basis will be correct and the gain or loss will be accurate. This helps with deciding which investments to sell.

[Mark]

Hi steve at SFI,

You'll have to educate me here... What sort of investment are you tracking? I'm not familiar with why the tax cost basis of the underlying shares goes up when they receive interest payments. I normally think of these interest payments as being taxed as received interest when they receive them, so the tax cost basis of the underlying shares does not increase.

There are only a couple of ways to affect cost basis in Fund Manager:

1) The cost of the purchase transaction
2) Account Fee or Return of Capital distribution types. When you record an Account Fee type of distribution, this is added to the cost basis for capital gain calculations. When you record a Return of Capital type of distribution, this lowers your cost basis.

[steve at SFI]

I did adjust the basis of the fixed income investment using the account fee and return of capital. The only problem is the offset goes to the cash account and I have to go in and delete those entries. It would be nice to have a separate item that could be used for amortization with the offset being a separate item of interest income.

Amortization adusts the actual return on an fixed income investment over the term of the note due to the difference between par value and the purchase price. Most individuals don't book these adjustments. I find it useful, specifically on zero coupon bonds, to pick up the interest over the life of the bond as opposed to all at once at maturity.

[Mark]

Hi Steve,

If you set up your fixed income investments with the appropriate bond settings under "Investment Properties... / Income", Fund Manager will automatically calculate accrued interest for you, and factor it into many of the calculations.

[steve at SFI]

accrued interest is separate from the amortization of premium or discount of the par value on the purchase price of a bond