How do I record interest and increased value for a zero-coupon bond?

Zero-coupon bonds are purchased at a discount. During the time that you hold them, their value increases as they earn interest. Although you don't receive this interest until you sell the bonds, the interest is reported to you every year on form 1099 OID as taxable interest income.

Your cash balance is increased by the interest income and then decreased by the return of capital. It should be unchanged after the two transactions.

Use the Income dialog to record the interest income from a zero-coupon bond, and use the Return of Capital dialog to record the increase in the value of the bond. Note that return of capital is not the same as a capital gains distribution.

Open the account you want to use.
Click Enter Transactions.

To record the interest income
1. In the Enter Transaction list, select Inc - Income.
2. Fill in the Income dialog.
To record the increase in the value of the bond
1. In the Enter Transaction list, select Return of Capital.
2. Enter a dollar amount equal to the negative value of the interest. (The negative return of capital increases your cost basis. It reduces realized gain, if you sell the bond or update the current market price of the bond.)
  For example, if you recorded interest income of $17, you would enter -$17 as the return of capital

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