Adjusted Basis is the value assigned to an asset after the affects of all deductions or additions for improvements have been taken into consideration for real property. An investor’s adjusted basis for a bond takes any accretion of a discount or amortization of a premium over the life of a bond. The adjusted basis is important as it will be used to determine if the investor has a gain or loss on the bond if the bond is sold prior to maturity.
Applying "Adjusted Basis" to Securities Exams:
On many FINRA exams certain muni bonds are required to be adjusted for tax purposes. When a customer buys a muni bond at a premium, the cost basis must be adjusted down (amortized) for tax purposes. And when a customer buys an original issue discount (OID) muni bond the cost basis must be adjusted up (accreted) for tax purposes. In both cases, if the customer sells the bond prior to maturity, the adjusted basis is what is used to determine the customer’s tax consequence. It is important to note that you must always use the annualized premium or discount over the time remaining until maturity.