This week’s study question from the Solomon Online Exam Simulator question database is now available.
“Phantom tax exposure“ is a characteristic of:
II. Treasury STRIPS
III. Zero-coupon bonds
IV. Municipal revenue bonds
A. I, II and III
B. I and IV
C. II and III
D. None of the choices listed
Correct Answer: C. II and III
Rationale: Treasury STRIPS, which are sold at a discount and don’t pay annual interest to owners, are a type of zero coupon bond. Zeroes are taxed each year based upon the imputed annual value of the cumulative interest earned. “Phantom tax exposure“ means you pay taxes each year on interest you don’t receive. The trade-off is that you avoid reinvestment risk along the way.
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