Chapter 4 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 is $10,000. Assuming she holds the bond to maturity, what would her capital gain or loss be?
A. $0 capital gain, with $375 of taxable income
B. $0 capital loss, with a $375 loss
C. $375 capital gain
D. $1,000 capital loss
2. Lynn buys a 10-year municipal bond in the secondary market for $4,800 five years after its issuance. The bond has a face value of $5,000 with a coupon rate of 5%. She sells the bond two years later for $5,100. Assume she has no other taxes or losses. Also assume she decides to take any gain or loss at the sale and not accrete the amount of the discount. What are her gains or losses on the bond?
A. $200 gain, of which she pays no taxes because it is a municipal bond
B. $300 gain, of which $200 will be taxed at her ordinary income rate and $100 will be taxed at her capital gains rate
C. $300 gain, of which $80 will be taxed at her ordinary income rate and $220 will be taxed at her capital gains rate
D. $200 gain, which is taxable at her capital gains rate
3. Order the following bonds from lowest to highest yield:
I. NYC public purpose bond
II. NYC GO bond
III. NYC AMT bond
IV. NYC regular private activity bond
A. I, II, III, IV
B. II, I, III, IV
C. II, IV, III, I
D. I, III, IV, II
4. 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 ga