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Flauer [41]
3 years ago
12

A $10,000 municipal bond with 10 years to maturity is purchased in the primary market at 105. The bond is sold after 2 years at

105. The taxable gain or loss is a:
Business
1 answer:
Mama L [17]3 years ago
7 0

Answer: B. a 2 point capital gain

Explanation:

Municipal Bonds have to be amortized using the straight-line method and this applied to both newly issued or bonds being traded at a premium.

The bond in question is trading at 105 and so has a 5 point premium which needs to be amortized at 1 point a year for 5 years. As it was bought after two years, the amortization was 2 points which means the cost of the bond should be;

105 - 2 = 103

Yet it was sold for 105. The gain is therefore

= 105 - 103

= 2 point capital gain

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