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24 January, 09:56

An investor buys an 8% municipal bond in the secondary market on a 10% basis. The investor does not accrete the bond discount annually. If the bond is held to maturity, after considering taxes to be paid, the investor's yield will be:

A. 8%

B. 10%

C. more than 8% but less than 10%

D. less than 8%

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Answers (2)
  1. 24 January, 10:57
    0
    Answer: C

    Explanation:

    This is because although the coupon rate is devoid of federal income tax any market discount is taxed as interest income earned. So so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The discount can be accreted annually and tax paid, or the tax can be paid at maturity or sale date.
  2. 24 January, 11:01
    0
    Answer: A 8%

    Explanation:

    For a primary or secondary market, Municipal bonds of 8% was bought at a premium that are also a part of the process of that premium.

    The investor's interest which is a non-taxable income, for each yea, r it is decreased by the amortization amount with the same process, the cost of the bond'a basis is decreased by the amortization amount.

    At a growth level rate, the bond would not have a loss or capital gain since the cost basis that was adjusted has been amortized to $1000, for which the bond was regained at $1000.

    Furthermore, the bond will grow at 8% after tax yield, which was early stated.
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