1. You are required to report the OID each year over the life of the bond. Once the bond matures, you will have paid taxes on the purchase price and the OID so the basis will be the face value.
2. No, you are correct. The OID does reduce the price for purchase. An OID (Original Issue Discount) is the excess of a bond or note's stated redemption price over its issue price. The "stated redemption price" is usually the face value of the bond or note (say $10,000). The "issue price" is generally the amount at which the bond or note was first sold by the issuer (say $9,500). You will receive Form 1099-OID at the end of the year in order to report the discount of $500. This is your profit and it is taxable interest income for you over the life of the bond.
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