As I understand it, when a bond is *issued* at a discount to fair market value it possesses "original issue discount". This OID then lives with the bond during its entire lifetime. Various questions on OID:
1) When a broker issues a 1099-OID for a bond that is purchased on the secondary market, do they prorate the OID to the holding period of the bond? For example, if you buy in October and sell in November, can you reasonable expect that the 1099-OID you receive is for that holding period?2) If the bond is in default and pays no interest at all, are you still liable to pay the OID? Regardless of whether the payment of OID is required, this is obviously an extremely unfair requirement. If you buy a bond on secondary market that is defaulted, you get no benefit at all from the interest payments, and therefore being required to pay an OID on that bond seems quite unfair.