Profit opportunities with old OIDs.

The article determines whether zero coupon bonds and other original issue discount bonds (OIDB) issued before July 1, 1982 may provide potential profit opportunities to investors. Non-taxable holders of such bonds may be able to sell them before maturity date at attractive prices, producing a much higher-than-expected rate of return over their holding period while taxable investors may be able to buy these bonds at prices that produce attractive after-tax returns. There is a difference between the linear accretion schedule used by the U.S. Internal Revenue Service (IRS) and the market accrual schedule and this difference can become profit opportunities. As an OIDB becomes seasoned, the discrepancy between the IRS benchmark price and the price to yield widens, which increases the potential capital gain of the second buyer. Since capital gains are valuable to taxable investors, taxable buyers who avoided the new OIDB will become interested in OIDB in the secondary market.