This post is to seek advice from tax experts and investors.

I started investing into some corporate bonds in 2009 and for the year 2009, I have received some income slips from my broker (Edward Jones). I have a few situations which I want clarifications on:

1. I bought a bond on March 31 for 20K with a coupon of 6.0% (coupon payment dates as 30 April and 30th Oct). At the time of buying there was an accrued interest of about $500 and so the amount that I paid was the bond price plus accrued interest. During the year I received two interest payments of $600 each. The slip I have got shows interest earning for $1,200 which is equal to the cash payments received. However, in true sense, my interest earnings is only about $900 (20K times interest for 9 months that I held the bond for). Why should I pay tax on an income of 1100?
2. Another bond that I bought on May 31 for 20k carries a coupon of 3.65% with payment dates of March 31 and Sept 30. When I bought the bond I paid the price of bond plus about $121.66 as interest accrued. During the year, I got ONE payment of $365 and the slip issued to me is for total interest earnings of $365 only. According to my calculation, I have earned interest during 2009 for 7 months and that amounts to about 425.83. Shouldn’t I be paying tax on interest earnings of 425.83?


So it seems that tax slips is issued on cash basis and not accrual basis. Does it mean that if I sell a bond just a few days before the interest payment date, while I will receive the accrued interest at the time of sale, I will not have to include that in my interest earnings since a slip will not be issued to me for that interest?

Also, it would mean that the accrued interest paid by me at the time of buying is considered as cost and at the time of sale is considered sale proceeds? If that be the case, the accrued interest is being taxed as capital (50%) rather than income (100%)?

Since this is the first time I have invested in bonds, I am a bit perplexed and need advise from investors if this is the way income has to be reported or is it to be reported on accrual basis? What would happen if I had sold off my first investment soon after the receipt of second interest payment and I would have held my investment only for 7 months? My slips would still show an interest earnings of $1,200.

-----------------------------------------------------------------
Chandresh

Advice is free – lessons I charge for!!

So many investors on this forum and so many tax experts but still not a single response???

-----------------------------------------------------------------
Chandresh

Advice is free – lessons I charge for!!

It is redundant for anyone of us to add more to it. You have answered your own question.

INSTRUMENT: Let me start as one should start to explain. Bonds are Debt instruments. Stocks are equity and one owns a part of a company when he has a share. Bonds are raised by companies and they borrow from the markets (i.e., you and me) and they owe that money and hence is a DEBT in their books.

RATING: They are also rated as Triple A, Aaa etc down to a level known JUNK bonds. Some or most of the current bonds are all junk bonds.

COMPANIES THAT RATE THEM : There are companies that rate them and one is Moody's and the next one S & P. Both have failed the world and I call them scammers. They all went to sleep at the wheels, that is what caused this financial accident. The insurance company that was holding the bag was AIG (In USA)

FACE VALUE: At the first sale or issue of the bonds, it has a fixed value, and interest is quoted at sale and is FIXED.

TYPE: Bills Notes and Bonds....

CHARECTERISTICS : Based on that this interest amount a coupon is given either quarterly, monthly or at a frequency as the coupon will tell us. The interest rate fluctuations at the outside markets that currently prevail will then dictate if there is a demand for that particular Bond that you buy OR not. Based upon the demand for it, it will command a premium.

MATURITY : The last day upto which you can hold them and get interest.

**Other factors : Interest and the confusion: Calculation of which is what you are asking us about. That is an accountant's night mare. YTM, Yield To Maturity.... Only time will tell.

While you are holding this, may be for the entire duration, the rest of the world does not sleep or stay steady financially. EVERY day brings a different news that makes your holding a bonus or at Par or into a junk status.

The only consolation is that the stock market takes a beating and the Bonds are becoming invaluable. But when a company goes belly up, your bonds that they issued, get into junk status, I know you will get your money first, but it all depends if they have any money when they do so. The big wigs write a cheque to themselves for the Bonus that they were due in their contracts and get the balance to zero. See Nortel's case....

http://www.freeinvestingreports.com/daily-reckoning/g032410blp?gclid=COvf-duW8aACFQk65QodCThjHA

See how they camouflage your purchase, it has a PREMIUM if the interest Rate it is paying is better than what the Banks are paying on your deposit. So, your purchase got padded up with a premium. Then, when you buy that instrument, and if you do so, prior to the coupon being cut out, then, they add the interest that it has accrued to the Bond and flog you on top of it and ask for more and YOU PAID it. So you now know this and you have answered your own question and I felt that there is no use rubbing more salt into your wounds.

AND I want to tell you as a RE ASSURANCE, what you are holding is a GOLD Mine, because you should read the article on the BLOWING UP Of the Bond markets that is going to start from tomorrow. AND that is what prompted me to write this response to you. When you get hold of it... Have a good one on me.

NOw, go to sleep and enjoy the Bonds and the holdings you have.

Freddie.

Side note: EDIT: Please see if you can add these to the TFSA. Might give you and the better half a free bonus.