Imputed Interest/OID of US Treasury STRIPS

Q

What is Imputed Interest/OID of US Treasury STRIPS?

✍: FYIcenter.com

A

Imputed Interest, also called phantom interest, of a US Treasury STRIPS (T-STRIPS) is the accrued interest in a calendar year converted from the price discount on the T-STRIPS.

When you buy a T-STRIPS with a discounted price, the price discount is considered by IRS (Internal Revenue Service) as an interest income, not as a capital gain. IRS also requires you to spread this interest income to each calendar year while you own the T-STRIPS, and report it in your year-end tax return. Basically, IRS wants to tax your return on a T-STRIPS as a regular non-zero interest debt investment.

The portion of the price discount converted as an interest in a calendar year for tax reporting purpose is referred as imputed interest, or phantom interest, because you do not receive any interest from a T-STRIPS.

Imputed interests on STRIPS is considered as OID (Original Issue Discount) by IRS for income tax, even you bought it at a market discount after the original issue date, not when the STRIPS was ogiginally issued.

Imputed interests are commonly be calculated in these steps:

1. Calculate the YTM (Yield To Maturity) from the price discount using the formula given in the previous tutorial.

2. At the end of the first coupon period, calculate the imputed interest for the period using the YTM on the purchase price as the present value. Then add the imputed interest to the present value.

PV = Price
Interest = PV*(1+0.5*YTM)**f - PV   (for the first period)
PV := PV + Interest

3. At the end of each subsequent coupon period, except the last one, calculate the imputed interest for the period using the YTM on the present value. Then add the imputed interest to the present value.

Interest = PV*0.5*YTM   (for remaining periods, except last)
PV := PV + Interest

3. At the end of the last coupon period, calculate the imputed interest for the period using the present value difference from the par value. This is to ensure that the sum of imputed interests from all coupon periods equals to the price discount you received when you bought the STRIPS.

Interest = Par - PV   (for the last period)

Once the imputed interest for each coupon period is calculated, it can be phantomly paid out to the owner of the STRIPS as taxable interest income with 2 options:

The imputed interest of a coupon period is divided equally to each day in the period and paid out daily.
The imputed interest of a coupon period is paid out one time at the end of the period. This matches the semi-annuall coupon payment schedule of the original T-Note/T-Bond.

Option 2 seems to be more logical, because that's how interests of non-zero T-Note/T-Bond are paided and taxed. But IRS tax law uses option 1, which acrrues imputed interest/OID daily. See next tutorial for more details.

Note that the brokerage where you bought the T-STRIPS will actually calculate the imputed interest each year for you and send it to you in a 1099-OID (Original Issue Discount) form.

Let's use the first bidding quote of a 30-year T-STRIPS on Fidelity Investments as an example to demonstrate how imputed interests are calculated. Par value of $10,000.00 is used in the example.

CUSIP: 912834PB8
Description: U S TREAS SEC STRIPPED INT PMT 0.00000% 11/15/2044ZERO CPN 
Maturity: 11/15/2044

Price: $36.839 (for $100.00 par value)
Yield: 5.216% (YTM - Yield To Maturity)
Settlement Date: 2025-06-23 (Next business day)

Par value: $10,000.00

US Treasury STRIPS - Buy/Sell with Fidelity Investments

Since the YTM is already provided on the quote, we can skip the YTM calculation step.

If we follow imputed interests calculations for all coupon periods sequentially, and divide them equally to each day in each period, we get:

2025-06-23: PV = Price = 3683.90
2025-11-15: Interest = 3683.90*(1+0.5*0.05216)**(145.0/184) - 3683.9 = 75.51
2025-11-15: PV = 3683.90 + 75.51 = 3759.41
Imputed interest for year 2025: 75.50, 145 days from 2025-06-23 to 2025-11-15

2026-05-15: Interest = 3759.41*0.5*0.05216 = 98.05
2026-05-15: PV = 3759.40 + 98.05 = 3857.45 
Imputed interest for year 2025: 24.92, 46 days from 2025-11-15 to 2025-12-31
Imputed interest for year 2026: 73.13, 135 days from 2025-12-31 to 2026-05-15

2026-11-15: Interest = 3857.45*0.5*0.05216 = 100.60 
2026-11-15: PV = 3857.45 + 100.60 = 3958.05
Imputed interest for year 2026: 100.60, 184 days 2026-05-15 to 2026-11-15

2027-05-15: Interest = 3958.05*0.5*0.05216 = 103.23
2027-05-15: PV = 3958.05 + 103.23 = 4061.28
Imputed interest for year 2026: 26.24, 46 days from 2026-11-15 to 2026-12-31
Imputed interest for year 2027: 76.99, 135 days from 2026-12-31 to 2027-05-15

...

If we can easily calculate the total imputed interest for each calenday year, and report in year-end tax returns.

Imputed interest for year 2025: 75.51 + 24.92 = 100.43
Imputed interest for year 2026: 73.13 + 100.60 + 26.24 = 199.97
...

You can also use our imputed interest calculator to validate the result. Click this link "T-STRIPS 912834PB8 settled on 2025-06-23 with a price of $36.839 and YTM of 5.216%", you will see imputed interests displayed for each calendar year.