Re: Bond Performance and ROI/Yield

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In Reply to: Bond Performance and ROI/Yield posted by Gary Trimmier on March 05, 2006 at 10:40:54:

: Mark,
: I have searched the board and in numerous questions and responses I cannot seem to find any information on how to correctly record a bond purchase. To cite an example of my problem: I have purchased a bond whose par value is $100.00 for $104.00. Its my understanding that bonds are traded like stock, and can be bought and sold above or below the maturity value (par value). However, also the buyer (me) will pay the seller the accured interest on the bond on the day of purchase. Lets say that amounts to $1.50. So now the cost of the bond is $105.50. Also there is a handleing fee associated with the purchase of $1.00. Can you or someone suggest the correct way to record these transactions, so that FM will present the correct performance/ROI/yield.
: Thanks,
: Gary Trimmier

Hi Gary,

The easiest method is to record the purchase at $106.50, which covers all your costs to purchase the bond. You could record it at a price of $104, and then in the commission field put in the amount for interest/fees, which would be the $2.50. This is the simplest method, and will provide correct yields. This method however does add the accrued interest paid into your cost basis for capital gain calculations if/when you sell the bond. If you do not want the accrued interest payment to be included in your tax cost basis you can record the accrued interest payment as a separate distribution. You could do this:

1) Record a purchase for $104 with a commission of $1.
2) Record a distributed interest income type distribution for -1.50.

Both methods will provide accurate yields. The second method lowers your tax cost basis for when you sell it. I do not know whether the accrued interest payment is supposed to be included in your tax cost basis or not, so once you determine that, you can choose the appropriate entry method.

Thanks,
Mark
--
Mark Beiley
Fund Manager - portfolio management software for Windows

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