| -- End Ad Box ---> | | | | treat the purchase and sale of any stock. If you |
| Microsoft Money provides powerful investment | | | | make money, you realize a gain. If you lose money, |
| record-keeping tools for individual investors. | | | | you realize a loss. |
| Unfortunately, once you step beyond investments | | | | If you buy or sell a put or call and hold the option |
| like stocks, bonds, and mutual funds, the mechanics | | | | until it expires, things work almost the same way. |
| can get a little tricky. Here are some tips for handling | | | | However, in this special case, you do need to record |
| common investments in Money. | | | | a Final Sale transaction, and the sales price is zero. |
| Certificate of deposits | | | | Obviously, if you hold a put or call until it expires, you |
| If you purchase a certificate of deposit, you can | | | | don’t actually sell the derivative. But you need |
| treat it in the same way that you treat a bond | | | | to record a sale transaction to reflect the fact that |
| purchase. Basically, certificates of deposits, or CDs, | | | | the option is no longer worth anything. |
| are just bonds issued by banks or financial institutions | | | | These are the basic techniques you need to know |
| often for a shorter period of time. For example, you | | | | for put and call record keepingand record keeping |
| can think of a two-year CD as equivalent to a | | | | for similar derivativesbut there are two special |
| two-year bond. | | | | circumstances in which more complicated record |
| Zero coupon bonds | | | | keeping is required. |
| If you invest in bonds, you may know that some | | | | Selling Puts and Calls |
| bonds don’t actually pay periodic interest. | | | | If you sell puts and callsnote that the earlier |
| Instead, these bonds, called zero coupon bonds, pay | | | | discussion involves you in investing puts and |
| their interest when the bond matures. For zero | | | | callsyou need to record the option as a regular |
| coupon bonds, you need to annually accrue the | | | | buy or sell transaction. In other words, if you sell a |
| interest on the bonds. The annual interest needs to | | | | put and the person to whom you sell it exercises the |
| be accrued because, by convention, you report the | | | | put, you record this transaction as a regular sales |
| annual increase in the zero coupon bond’s | | | | transaction. Similarly, if you sell a call, you record the |
| value as interest earned. | | | | transaction as a regular buy transaction. |
| To record accrued interest on a zero coupon bond, | | | | If you sell a put or call option and the option never |
| record bond interest that accrues in the normal way. | | | | gets exercised, you record the amount of money |
| In other words, whatever amount shows as being | | | | the buyer pays you as Other Income. |
| accruedthis should appear on the statement from | | | | Exercising Puts and Calls |
| your brokerrecord it as bond interest income. | | | | Typically, individual investors don’t actually |
| After you record the bond interest that’s | | | | exercise puts and calls that they buy. Instead, they |
| accrued, you need to record a return of capital | | | | simply sell the option back to the broker. However, |
| transaction that adds this accrued interest back to | | | | you might end up exercising a put or call, and in this |
| the value of the bond. The amount of this capital | | | | case, you need to perform special record keeping. |
| transaction, obviously, needs to equal the accrued | | | | To record the exercise of a put option, record the |
| interest amount. But there is a twist here: You need | | | | sale of the put option at a price equal to zero. This |
| to specify the return of capital amount as a negative | | | | zero-value sale is how you record the expiration of |
| value. For example, if you accrue $100 of interest on | | | | the option. After you have recorded the expiration |
| a zero coupon bond, you also need to record a | | | | of the option, you record the sale of the stock in the |
| return of capital transaction for the bond equal to | | | | same way that you record the sale of any stock. |
| —$100. | | | | (Remember that a put is an option to sell stock.) |
| By recording the return of capital transaction, you in | | | | To record the exercise of a call option, record the |
| effect transfer the bond interest money from the | | | | sale of the call option at a price equal to zero. This |
| associated cash account and add it back to the zero | | | | zero-value price lets you record the expiration of the |
| coupon bond’s value. In this way the | | | | option. After you have recorded the expiration, you |
| associated cash account shows the correct cash | | | | record a regular buy transaction. (Remember that a |
| balance and the zero-coupon bond shows the correct | | | | call option is an option to buy a security.) |
| cost basis. The zero coupon bond’s cash basis | | | | Precious metals and commodities |
| equals the original purchase price plus all the accrued | | | | You can treat investments in gold and other precious |
| interest that’s been recorded to date. | | | | metals, gold coins, agricultural items, and other |
| Derivatives | | | | commodities in the same way that you treat shares |
| Derivatives are securities that derive their value from | | | | of stock. Rather than entering a share price, you |
| some underlying security. For example, an option to | | | | enter a price per ounce or a price per bushel. And |
| sell a stock, called a put, is a derivative. It derives its | | | | rather than recording a specific number of shares, |
| value from the underlying security. Another derivative | | | | you enter a specific number of whatever unit of |
| is an option to buy a stock, called a call. You can use | | | | measure is used to describe the commodity. |
| Money to keep records of derivatives, such as puts | | | | In the case of gold, for example, you might enter |
| and calls you buy. | | | | the number of ounces. In the case of an agricultural |
| In general, derivative record-keeping is quite | | | | item, you might enter the number of bushels. |
| straightforward. If you buy a derivative, say a put or | | | | You can treat options to buy or sell commodities in |
| a call, and later sell the derivative, you simply have a | | | | the same way that you treat options to buy or sell |
| normal investment transaction. You treat the | | | | securities. |
| purchase and later the sale in the same way that you | | | | |