Chapter 6 Practice Questions
- 1. Sally purchased an OID 20-year municipal bond for $4,000 five years after it was issued. The bond was issued at a price of $2,500. The par value of the bond was $10,000. Assuming she held the bond to maturity, and that this occurred before the ratable method was disallowed for calculating the accretion of OIDs, what was Sally’s taxable income?
- A. $375 as ordinary income
- B. $375 as capital gains
- C. $0
- D. $1,000 as capital gains
- 2. Lynn bought a 10-year municipal bond in the secondary market for $4,800. The bond has a face value of $5,000 with a coupon rate of 5%. It is redeemable in five years. She sells the bond two years later for $5,100. What are her capital gains or losses on the bond?
- A. $220 capital gain
- B. $300 capital gain
- C. $200 capital loss
- D. $100 capital gain
- 3. John recently sold a municipal bond. The proceeds from the sale were greater than the adjusted cost basis. Which of the following is true?
- A. John has incurred capital gains that he must pay taxes on.
- B. John has incurred capital gains that he will not pay taxes on, because municipal securities are tax-exempt.
- C. John has not incurred capital gains, because this is not possible on municipal bond transactions.
- D. John has incurred a capital loss that the he can use to offset other capital gains.
- 4. If a municipal OID bond is purchased at issue and is held to maturity, how will the appreciation on the value of the bond be taxed annually? Choose the best answer.
- A. The bondholder will need to report the accreted interest on their taxes, but it will be tax-exempt
- B. The bondholder will need to report the accreted interest on their tax forms and it will be taxed as ordinary income
- C. The bondholder will need to report the accreted interest on their tax forms and it will be taxed as a capital gain
- D. The bondholder will not nee