In January 28,2011, I bought 800 shs of "Merrill Lynch Capital Trust
7% Perpetual Topper" (a trust preferred; I don't know what a "Topper" is) for 23.965 plus commision. In my 1099 information, there is a section for 1099 OID of $1279.45.i received the expected 4 interest payments of $350 last year, but they are not listed in the detail section of my 1099 . That led me to the idea that the OID amount had noting to do with a discount from the purchase price, but rather had something to do with the 27 days that I actually didn't own it, and therefore was not entitled to the full first month's interest payment UNLESS, under the covers, that was built into the price. Some rough calculations indicate that I'm correct. If you subtract 27 days of interest from the $1400 I received, it comes out very close the the interest received. My only question is why is the entire amount called OID, instead of just the amount possibly built into the purchase price to cover the interest for the period I didn't own it? With bonds, I have seen this broken out as Accrued interest, and then standard interest, but this seems to have been treated differently, lumping the full year's interest payments into OID.
Sorry this isn't more crisply explained. Just want to know if I'm on the right track and possibly a general idea of why it gets treated as it has been. Thanks.