TIPS Bonds Acquisition Premium Amortization

[HouseOfLancaster]

I bought some TIPS Bonds on 12/09/2022 at premiums to par via our Vanguard brokerage account and was expecting to see Acquisition Premium amortization amounts in box 6 of my 2022 1099-OID. However, the 1099-OID has zeros in box 6. I've made a couple calls to Vanguard on this but no one has been able to explain this to me. So, 2 questions:

1) Given that my first interest income payments on these bonds were not received until 02/15/2023, am I only allowed to take the benefit of premium amortization at the time of receipt of the interest income payments? So that proper tax accounting would be $0 in amortization in 2022 and amortization to be recognized in 2023 only for the periods from 12/09/2022 through 02/15/2023 and from 02/16/2023 through 08/15/2023? That it, no amortization recognized in 2022 or for the 2023 period from 08/16/2023 through 12/31/2023?

2) Is anyone aware of a reliable calculator to easily calculate the amortization amounts for relevant periods of time?

Thanks!

[FactualFran]

Amortizing bond premium with each coupon payment is a standard method. In this case, there will be no amortized bond premium adjustment on the income tax return for 2022. There will be an amortization bond premium adjustment on the income tax returns for 2023 and later years until the bond matures, is sold, or is transferred.

[HouseOfLancaster]

OK, great--thanks, Fran

[#Cruncher]

I bought some TIPS Bonds on 12/09/2022 at premiums to par ... and was expecting to see Acquisition Premium amortization amounts in box 6 of my 2022 1099-OID. However, the 1099-OID has zeros in box 6.

I don't know exactly what box 6 on a 1099-OID is intended for, but I don't think it has anything to do with bond premium amortization for a TIPS. It is reported in box 12, "Bond Premium on Treasury Obligations" of a 1099-INT. That is where TreasuryDirect reports it for a $1,000 TIPS I purchased for educational purposes.

This mention of OID got me to wondering. The premium to be amortized should refer to the unadjusted price, not the adjusted price including the index ratio. Only the 30-year TIPS maturing 2040 and later pay interest on Feb 15. On 12/9/2022 ten of these had adjusted prices over 100; but only two had unadjusted prices over 100: the 2/15/2040 and the 2/15/2041 maturity each with a 2-1/8% coupon. Did you buy one of these two?

Code: Select all

12/09/2022         Unadjusted     Index  Adjusted
   Matures  Coupon      Price     Ratio     Price

Code: Select all

 2/15/2040  2.125%  111.28125   1.37466    152.97
 2/15/2041  2.125%  111.43750   1.35676    151.19
 2/15/2042  0.750%   88.87500   1.31491    116.86
 2/15/2043  0.625%   85.81250   1.29232    110.90
 2/15/2044  1.375%   98.90625   1.27486    126.09
 2/15/2045  0.750%   86.90625   1.26175    109.65
 2/15/2046  1.000%   91.62500   1.25396    114.89
 2/15/2047  0.875%   88.65625   1.23085    109.12
 2/15/2048  1.000%   90.93750   1.20488    109.57
 2/15/2049  1.000%   91.18750   1.18075    107.67
 2/15/2050  0.250%   74.75000   1.15568     86.39
 2/15/2051  0.125%   72.09375   1.14122     82.27
 2/15/2052  0.125%   72.43750   1.06733     77.31

The unadjusted prices are ask prices from the WSJ TIPS Quotes for 12/9/2022 which I had saved in a spreadsheet. The index ratios are from this webpage.

[HouseOfLancaster]

I don't know exactly what box 6 on a 1099-OID is intended for, but I don't think it has anything to do with bond premium amortization for a TIPS. It is reported in box 12, "Bond Premium on Treasury Obligations" of a 1099-INT. That is where TreasuryDirect reports it for a $1,000 TIPS I purchased for educational purposes.

Ahh, I see--thanks. That box 12 is also $0 but, per Fran's note above, I now gather that's correct.

This mention of OID got me to wondering. The premium to be amortized should refer to the unadjusted price, not the adjusted price including the index ratio. Only the 30-year TIPS maturing 2040 and later pay interest on Feb 15. On 12/9/2022 ten of these had adjusted prices over 100; but only two had unadjusted prices over 100: the 2/15/2040 and the 2/15/2041 maturity each with a 2-1/8% coupon. Did you buy one of these two?

Code: Select all

12/09/2022         Unadjusted     Index  Adjusted
   Matures  Coupon      Price     Ratio     Price

Code: Select all

 2/15/2040  2.125%  111.28125   1.37466    152.97
 2/15/2041  2.125%  111.43750   1.35676    151.19
 2/15/2042  0.750%   88.87500   1.31491    116.86
 2/15/2043  0.625%   85.81250   1.29232    110.90
 2/15/2044  1.375%   98.90625   1.27486    126.09
 2/15/2045  0.750%   86.90625   1.26175    109.65
 2/15/2046  1.000%   91.62500   1.25396    114.89
 2/15/2047  0.875%   88.65625   1.23085    109.12
 2/15/2048  1.000%   90.93750   1.20488    109.57
 2/15/2049  1.000%   91.18750   1.18075    107.67
 2/15/2050  0.250%   74.75000   1.15568     86.39
 2/15/2051  0.125%   72.09375   1.14122     82.27
 2/15/2052  0.125%   72.43750   1.06733     77.31

The unadjusted prices are ask prices from the WSJ TIPS Quotes for 12/9/2022 which I had saved in a spreadsheet. The index ratios are from this webpage.

Yes, I bought both the 02/15/40 and 02/15/41 bonds and those are the ones for which I was expecting a premium amortization number.

[#Cruncher]

Is anyone aware of a reliable calculator to easily calculate the amortization amounts for relevant periods of time?

Yes, I bought both the 02/15/40 and 02/15/41 bonds and those are the ones for which I was expecting a premium amortization number.

Here's an Excel calculator illustrated with $10,000 face value of the Feb 2040 purchased 12/9/2022 at a price of 111.28125. It assumes premium is amortized through the 2nd interest payment date, August 15th, every year until maturity on February 15th 2040. Using the initial yield-to-maturity (calculated with the Excel YIELD function), it calculates what the price would be on the given date with Excel's PRICE function. It then applies that price against the original inflation-indexed principal. The change in this principal value is the amortization for the period.

Code: Select all

Row        Col A        Col B       Col C    Col D  Formula in Column B
  2   Face value       10,000
  3       Issued   12/09/2022
  4      Matures    2/15/2040
  5       Coupon       2.125%
  6  Unadj price    111.28125
  7        Yield       1.385%                       =YIELD(B3,B4,B5,B6,100,2,1)
  8  Index ratio      1.37466
  9    Principal    13,746.60                       =B2*B8
 10   Princ cost    15,297.39                       =B9*(B6/100)
 11      Premium     1,550.79                       =B10-B9
 12       Settle        Price     X Princ    Amort

Code: Select all

 13   12/09/2022    111.28125   15,297.39           =IF(A13=B$4,100,PRICE(A13,B$4,B$5,B$7,100,2,1))
 14    8/15/2023    110.88186   15,242.49    54.90   |
 15    8/15/2024    110.29053   15,161.20    81.29   |
 16    8/15/2025    109.69098   15,078.78    82.42   |
 17    8/15/2026    109.08310   14,995.22    83.56   |
 18    8/15/2027    108.46677   14,910.49    84.72   |
 19    8/15/2028    107.84188   14,824.59    85.90   |
 20    8/15/2029    107.20830   14,737.50    87.10   |
 21    8/15/2030    106.56592   14,649.19    88.31   |
 22    8/15/2031    105.91461   14,559.66    89.53   |
 23    8/15/2032    105.25424   14,468.88    90.78   |
 24    8/15/2033    104.58470   14,376.84    92.04   |
 25    8/15/2034    103.90586   14,283.52    93.32   |
 26    8/15/2035    103.21757   14,188.91    94.62   |
 27    8/15/2036    102.51973   14,092.98    95.93   |
 28    8/15/2037    101.81218   13,995.71    97.26   |
 29    8/15/2038    101.09480   13,897.10    98.62   |
 30    8/15/2039    100.36746   13,797.11    99.99   v
 31    2/15/2040    100.00000   13,746.60    50.51  =IF(A31=B$4,100,PRICE(A31,B$4,B$5,B$7,100,2,1))
 32          Sum                          1,550.79

[HouseOfLancaster]

Here's an Excel calculator illustrated with $10,000 face value of the Feb 2040 purchased 12/9/2022 at a price of 111.28125. It assumes premium is amortized through the 2nd interest payment date, August 15th, every year until maturity on February 15th 2040. Using the initial yield-to-maturity (calculated with the Excel YIELD function), it calculates what the price would be on the given date with Excel's PRICE function. It then applies that price against the original inflation-indexed principal. The change in this principal value is the amortization for the period.

Code: Select all

Row        Col A        Col B       Col C    Col D  Formula in Column B
  2   Face value       10,000
  3       Issued   12/09/2022
  4      Matures    2/15/2040
  5       Coupon       2.125%
  6  Unadj price    111.28125
  7        Yield       1.385%                       =YIELD(B3,B4,B5,B6,100,2,1)
  8  Index ratio      1.37466
  9    Principal    13,746.60                       =B2*B8
 10   Princ cost    15,297.39                       =B9*(B6/100)
 11      Premium     1,550.79                       =B10-B9
 12       Settle        Price     X Princ    Amort

Code: Select all

 13   12/09/2022    111.28125   15,297.39           =IF(A13=B$4,100,PRICE(A13,B$4,B$5,B$7,100,2,1))
 14    8/15/2023    110.88186   15,242.49    54.90   |
 15    8/15/2024    110.29053   15,161.20    81.29   |
 16    8/15/2025    109.69098   15,078.78    82.42   |
 17    8/15/2026    109.08310   14,995.22    83.56   |
 18    8/15/2027    108.46677   14,910.49    84.72   |
 19    8/15/2028    107.84188   14,824.59    85.90   |
 20    8/15/2029    107.20830   14,737.50    87.10   |
 21    8/15/2030    106.56592   14,649.19    88.31   |
 22    8/15/2031    105.91461   14,559.66    89.53   |
 23    8/15/2032    105.25424   14,468.88    90.78   |
 24    8/15/2033    104.58470   14,376.84    92.04   |
 25    8/15/2034    103.90586   14,283.52    93.32   |
 26    8/15/2035    103.21757   14,188.91    94.62   |
 27    8/15/2036    102.51973   14,092.98    95.93   |
 28    8/15/2037    101.81218   13,995.71    97.26   |
 29    8/15/2038    101.09480   13,897.10    98.62   |
 30    8/15/2039    100.36746   13,797.11    99.99   v
 31    2/15/2040    100.00000   13,746.60    50.51  =IF(A31=B$4,100,PRICE(A31,B$4,B$5,B$7,100,2,1))
 32          Sum                          1,550.79

This is TERRIFIC and exactly what I need for doing my quarterly estimates without the benefit of intra-year 1099 reporting from Vanguard. Once again, I'm in your debt, Cruncher.

[MisterMister]

Here's an Excel calculator illustrated with $10,000 face value of the Feb 2040 purchased 12/9/2022 at a price of 111.28125. It assumes premium is amortized through the 2nd interest payment date, August 15th, every year until maturity on February 15th 2040. Using the initial yield-to-maturity (calculated with the Excel YIELD function), it calculates what the price would be on the given date with Excel's PRICE function. It then applies that price against the original inflation-indexed principal. The change in this principal value is the amortization for the period.

Nice use of the PRICE function to solve the amortization problem in such elegant fashion. If only the PRICE function accepted the negative yield values that were prevalent for TIPs in recent times past.