Debt Instruments Issued After July 1, 1982, and Before 1985

If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the instruments and increase your basis by the amount included. For information about showing the correct OID on your tax return, see How To Report OID, earlier.

Form 1099-OID.   You should receive a Form 1099-OID showing OID for the part of the year you held the bond. However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. See Figuring OID using the constant yield method and the discussions on acquisition premium that follow, later.

Form 1099-OID not received.   If you held an OID instrument in 2002 but did not receive a Form 1099-OID, refer to Section I-A later in this publication. The OID listed is for each $1,000 of redemption price. You must adjust the listed amount if your debt instrument has a different principal amount. For example, if you have an instrument with a $500 principal amount, use one-half the listed amount to figure your OID.

If you held the debt instrument the entire year, use the OID shown in Section I-A for calendar year 2002. (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for 2002.) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods.

Method 1.  

1. Divide the total OID for 2002 by 365.
2. Multiply the result in (1) by the number of days you held the debt instrument in 2002.

This computation is an approximation and may result in a slightly higher OID than Method 2.

Method 2.  

1. Look up the daily OID for the first 2002 accrual period you held the instrument. (See Accrual period under Figuring OID using the constant yield method, next.)
2. Multiply the daily OID by the number of days in 2002 you held the instrument during that accrual period.
3. If you held the instrument for part of both 2002 accrual periods, repeat (1) and (2) for the second accrual period.
4. Add the results of (2) and (3). This is the OID to include in income for 2002, unless you paid an acquisition premium. (The reduction for acquisition premium is discussed later.)

Figuring OID using the constant yield method.   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. OID is allocated over the life of the instrument through adjustments to the issue price for each accrual period.

Figure the OID allocable to any accrual period as follows.

1. Multiply the adjusted issue price at the beginning of the accrual period by the instrument's yield to maturity.
2. Subtract from the result in (1) any qualified stated interest allocable to the accrual period.

Accrual period.   An accrual period for any OID instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. Your tax year will usually include parts of two accrual periods.

Daily OID.   The OID for any accrual period is allocated equally to each day in the accrual period. You must include in income the sum of the OID amounts for each day you hold the instrument during the year. If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period.

Figuring daily OID.   The daily OID for the initial accrual period is figured using the following formula.

	(ip × ytm) - qsi
	p

ip	=	issue price
ytm	=	yield to maturity
qsi	=	qualified stated interest
p	=	number of days in accrual period

The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price.

Example 9.   On January 1, 1984, you bought a 20-year, 13% bond for $90,000 at original issue. The redemption price of the bond is $100,000. The qualified stated interest is $13,000 (13% × $100,000), which is unconditionally payable each year. The bond has a yield to maturity of 14.5587%. The daily OID for the first accrual period is figured as follows.

	($90,000.00 x 14.5587%) - $13,000
	366 (leap year)

	=	$102.83	=	$.28096
		366

You would have included in income $.28096 for each day you held the bond during 1984. If you held the bond for all of 1984, you would have included OID of $102.83 ($.28096 × 366).

The following table shows the adjusted issue price, daily OID, and OID per accrual period through 2002.

Accrual Period	Year	Adjusted Issue Price	Daily OID	OID for Period
1	1984	$90,000.00	$ .28096	$ 102.83
2	1985	90,102.83	.32274	117.80
3	1986	90,220.63	.36973	134.95
4	1987	90,355.58	.42356	154.60
5	1988	90,510.18	.48391	177.11
6	1989	90,687.29	.55586	202.89
7	1990	90,890.18	.63679	232.43
8	1991	91,122.61	.72951	266.27
9	1992	91,388.88	.83342	305.03
10	1993	91,693.91	.95737	349.44
11	1994	92,043.35	1.09677	400.32
12	1995	92,443.67	1.25644	458.60
13	1996	92,902.27	1.43541	525.36
14	1997	93,427.63	1.64890	601.85
15	1998	94,029.48	1.88896	689.47
16	1999	94,718.95	2.16397	789.85
17	2000	95,508.80	2.47224	904.84
18	2001	96,413.64	2.83992	1,036.57
19	2002	97,450.21	3.25337	1,187.48

The daily OID for the 20th accrual period is figured as follows.

	($98,637.69 x 14.5587%) - $13,000
	365

	=	$1360.37	=	$3.72704
		365

If you hold the bond for all of 2003, you would include $1,360.37 in income ($3.72704 × 365).

Example 10.   Assume the same facts as in Example 9, except that you bought the bond at original issue on May 1, 1983. The daily OID for the first accrual period (May 1, 1983 - April 30, 1984) was $.28096, as figured in Example 9. If you held the bond until the end of 1983, you would have included $68.84 in income for 1983 ($.28096 × 245 days). If you continued to hold the bond, you would have included in income, for 1984 through 2001, the following amounts of OID.

Year	First Accrual Period	Second Accrual Period	Total
1984	$ .28096 × 121 days	$ .32274 × 245 days	$113.07
1985	$ .32274 × 120 days	$ .36973 × 245 days	129.31
1986	$ .36973 × 120 days	$ .42356 × 245 days	148.14
1987	$ .42356 × 120 days	$ .48391 × 245 days	169.39
1988	$ .48391 × 121 days	$ .55586 × 245 days	194.74
1989	$ .55586 × 120 days	$ .63679 × 245 days	222.71
1990	$ .63679 × 120 days	$ .72951 × 245 days	255.14
1991	$ .72951 × 120 days	$ .83342 × 245 days	291.73
1992	$ .83342 × 121 days	$ .95737 × 245 days	335.40
1993	$ .95737 × 120 days	$1.09677 × 245 days	383.59
1994	$1.09677 × 120 days	$1.25644 × 245 days	439.44
1995	$1.25644 × 120 days	$1.43541 × 245 days	502.45
1996	$1.43541 × 121 days	$1.64890 × 245 days	577.66
1997	$1.64890 × 120 days	$1.88896 × 245 days	660.67
1998	$1.88896 × 120 days	$2.16397 × 245 days	756.85
1999	$2.16397 × 120 days	$2.47224 × 245 days	865.38
2000	$2.47224 × 121 days	$2.83992 × 245 days	994.92
2001	$2.83992 x 120 days	3.25337 x 245 days	1,137.87

If you sold the bond on August 30, 2002, you would figure the amount to include in your 2002 income as follows.

First accrual period: $3.25337 × 120 days (Jan 1 - Apr 30)	$390.40
Second accrual period: $3.72704 × 121 days (May 1 - Aug 29)	450.97
Total to include in 2002 income	$841.37

However, if you held the bond the entire year of 2002, the total OID to report is $1,303.52 [$390.40 + $913.12 ($3.72704 × 245 days)].

Reduction for acquisition premium on debt instruments purchased before July 19, 1984.   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity.

Example 11.   Assume the same facts as in Example 10, except that you bought the bond for $92,000 on May 1, 1984, after its original issue on May 1, 1983. In this case, you paid more for the bond than its $90,102.83 adjusted issue price ($90,000 + $102.83). You paid $1,897.17 ($92,000 - $90,102.83) acquisition premium. The daily OID for the accrual period May 1, 1984, through April 30, 1985, reduced for the acquisition premium, is figured as follows.

1)	Daily OID on date of purchase (2nd accrual period)		$.32274
2)	Acquisition premium	$1,897.17
3)	Total days from purchase date to maturity date [(365 × 19 years) + 4 days for leap years]	6,939
4)	Line 2 ÷ line 3		$.27341
5)	Daily OID reduced for the acquisition premium. Line 1 - line 4		$.04933

The OID you would have included in income for 1984 is $12.09 ($.04933 × 245 days).

Assuming you still owned the bond in 2002, you would have reduced the total OID for each year (as determined in Example 10) by the allocable portion of the acquisition premium for that year. You would have included the following amounts of OID in income.

Year	OID
1985	$ 29.52
1986	48.35
1987	69.60
1988	94.67
1989	122.92
1990	155.35
1991	191.94
1992	235.33
1993	283.80
1994	339.65
1995	402.66
1996	477.59
1997	560.88
1998	657.06
1999	765.59
2000	894.85
2001	1,038.08

If you held the bond all of 2002, reduce the total OID for that year, $1,303.52 (as determined in Example 10), by the allocable part of the acquisition premium for 2002, $99.79 ($.27341 × 365 days). The difference, $1,203.73, is the total OID to include in income for 2002.

Example 12.   Assume the same facts as in Example 11, except that you bought the bond for $90,102.83. In this case, you bought the bond for an amount equal to the original issue price plus accumulated OID. Therefore, you did not pay an acquisition premium. You would have included $79.07 ($.32274 × 245 days) in income for 1984. For the remaining years, you would have included the amounts figured in Example 10.

Example 13.   Assume the same facts as in Example 11, except that you bought the bond for $89,500. You did not pay an acquisition premium because your cost was less than the adjusted issue price. You must include in income each year the amounts of OID figured in Example 12. The bonds have market discount, which must be reported under the rules explained in chapter 1 of Publication 550.

Reduction for acquisition premium on debt instruments purchased after July 18, 1984.   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction.

• The numerator is the acquisition premium.
• The denominator is the total OID remaining for the instrument after your purchase date.

Example 14.   Assume the same facts as in Example 9, except that you bought the bond for $99,000 on August 1, 2002, after its original issue on August 1, 1983. In this case, you paid more for the bond than its $98,637.71 adjusted issue price ($90,000 + $8,637.71 accrued OID). You paid $362.29 ($99,000 - $98,637.71) acquisition premium. The daily OID for the accrual period August 1, 2002, to July 31, 2003, reduced for the acquisition premium, is figured as follows:

1)	Daily OID on date of purchase (20th accrual period)		$3.72704*
2)	Acquisition premium	$362.29
3)	Total OID remaining after purchase date ($10,000 - $8,637.71)	1,362.29
4)	Line 2 ÷ line 3		0.26594
5)	Line 1 × line 4		0.99117
6)	Daily OID reduced for the acquisition premium. Line 1 - line 5		$2.73587
* As shown in Example 9.

The total OID to include in income for 2002 (August 1 - December 31) is $418.59 ($2.73587 × 153 days).

If you hold the bond until maturity in 2003, multiply the total OID for the year by 0.99117 and subtract the result from the total OID. The reduced amount is the total OID to be included in income for 2003.

Using Section I-A to figure accumulated OID.   If you bought your corporate debt instrument in 2002 or 2003 and it is listed in Section I-A, you can figure the accumulated OID to the date of purchase by adding the following amounts.

1. The amount from the Total OID to January 1, 2002 column for your debt instrument.
2. The OID from January 1, 2002, to the date of purchase, figured as follows.
   1. Multiply the daily OID for the first accrual period in 2002 by the number of days from January 1 to the date of purchase, or the end of the accrual period if the instrument was purchased in the second or third accrual period.
   2. Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies.
   3. Add the amounts figured in (2a) and (2b).

Debt Instruments Issued After 1984

If you hold debt instruments issued after 1984, you must report part of the discount in gross income each year that you own the instruments. You must include the OID in gross income whether or not you hold the instrument as a capital asset. Your basis in the instrument is increased by the OID you include in income. For information about showing the correct OID on your tax return, see How To Report OID, earlier.

Form 1099-OID.   You should receive a Form 1099-OID showing OID for the part of 2002 you held the bond. However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. See Figuring OID using the constant yield method and Reduction for acquisition premium, later.

You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later.

Form 1099-OID not received.   If you held an OID instrument in 2002 but did not receive a Form 1099-OID, refer to Section I-B later in this publication. The OID listed is for each $1,000 of redemption price. You must adjust the listed amount if your debt instrument has a different principal amount. For example, if you have an instrument with a $500 principal amount, use one-half the listed amount to figure your OID.

Use the OID shown in Section I-B for the calendar year if you held the instrument the entire year. (If your instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for 2002.) If you did not hold the debt instrument the entire year, figure your OID as follows.

1. Look up the daily OID for the first 2002 accrual period in which you held the instrument. (See Accrual period under Figuring OID using the constant yield method, later.)
2. Multiply the daily OID by the number of days in 2002 you held the instrument during that accrual period.
3. Repeat (1) and (2) for any remaining 2002 accrual periods in which you held the instrument.
4. Add the results of (2) and (3). This is the OID to include in income for 2002, unless you paid an acquisition premium. (The reduction for acquisition premium is discussed later.)

Tax-exempt bond.   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Use the rules that follow to determine your OID.

Figuring OID using the constant yield method.   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later.) OID is allocated over the life of the instrument through adjustments to the issue price for each accrual period.

Figure the OID allocable to any accrual period as follows.

1. Multiply the adjusted issue price at the beginning of the accrual period by a fraction. The numerator of the fraction is the instrument's yield to maturity and the denominator is the number of accrual periods per year. The yield must be stated appropriately taking into account the length of the particular accrual period.
2. Subtract from the result in (1) any qualified stated interest allocable to the accrual period.

Accrual period.   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Any short period is included as the first accrual period.

For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods.

Daily OID.   The OID for any accrual period is allocated equally to each day in the accrual period. Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods.

Figuring daily OID.   The daily OID for the initial accrual period is figured using the following formula.

	(ip × ytm/n) - qsi
	p

ip	=	issue price
ytm	=	yield to maturity
n	=	number of accrual periods in 1 year
qsi	=	qualified stated interest
p	=	number of days in accrual period

The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price.

Example 15.   On January 1, 2002, you bought a 15-year, 10% bond of A Corporation at original issue for $86,235.17. According to the prospectus, the bond matures on December 31, 2016, at a stated redemption price of $100,000. The yield to maturity is 12%, compounded semiannually. The bond provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. The accrual periods are the 6-month periods ending on each of these dates. The daily OID for the first accrual period is figured as follows.

	($86,235.17 x .12/2) - $5,000
	181 days

	=	$174.11	=	$.96193
		181

The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235.17 + $174.11), or $86,409.28. The daily OID for the second accrual period is figured as follows.

	($86,409.28 x .12/2) - $5,000
	184 days

	=	$184.56	=	$1.00304
		184

Since the first and second accrual periods coincide exactly with your tax year, you include in income for 2002 the OID allocable to the first two accrual periods, $174.11 ($.96193 × 181 days) plus $184.56 ($1.00304 × 184 days), or $358.67. Add the OID to the $10,000 interest you report in 2002.

Example 16.   Assume the same facts as in Example 15, except that you bought the bond at original issue on May 1, 2002. Also, the interest payment dates are October 31 and April 30 of each calendar year. The accrual periods are the 6-month periods ending on each of these dates.

The daily OID for the first accrual period (May 1, 2002 - October 31, 2002) is figured as follows.

	($86,235.17 x .12/2) - $5,000
	184 days

	=	$174.11	=	$.94625
		184

The daily OID for the second accrual period (November 1, 2002 - April 30, 2003) is figured as follows.

	($86,409.28 x .12/2) - $5,000
	181 days

	=	$184.56	=	$1.01967
		181

If you hold the bond through the end of 2002, you must include $236.31 of OID in income. This is $174.11 ($.94625 × 184 days) for the period May 1 through October 31 plus $62.20 ($1.01967 × 61 days) for the period November 1 through December 31. The OID is added to the $5,000 interest income paid on October 31, 2002. Your basis in the bond is increased by the OID you include in income. On January 1, 2003, your basis in the A Corporation bond is $86,471.48 ($86,235.17 + $236.31).

Short first accrual period.   You may have to make adjustments if a debt instrument has a short first accrual period. For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. (The remaining accrual periods begin on May 1 or November 1.) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. You may use any reasonable compounding method in determining OID for a short period. Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Consult your tax advisor for more information about making this computation.

The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period.

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