Question

A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $800. What will be an investor’s taxable income from the bond over the coming year? The bond will not be sold at the end of the year. The bond is treated as an original issue discount bond.

Answer 1

Answer:

40 dolllar for interest income

Explanation:

The taxable income will be the interest for the annual coupon payment:

$1,000 face value x 4% = $40

The purchase price will be considered for taxation purpose under capital gain if the bond is sold which is not the case. Thus, we must only determinate taxes considering the interest income from the coupon payment.