Question

"An investor purchased $10,000 of a 15 year AA rated corporate bond with a 6% coupon in the secondary market 3 years ago at par. The bond matured last week and the investor has just received a check for $10,300. Which of the following is a true statement?

A) The investors cost basis has been reduced to $9,700.
B)$300 is considered a return of principal.
C)$300 is taxed as long-term capital gain."

Answer 1

The $300 received by the investor over the principal amount of the bond is taxed as a long-term capital gain, as the bond was held for more than a year.

Step-by-step explanation:

The true statement among the options provided is that the $300 is taxed as a long-term capital gain. Since the investor purchased the bond at par and held it until maturity, the entire $10,000 principal amount would be returned, which does not affect their cost basis, making option A) incorrect. Option B) is also incorrect because the excess $300 over the principal is not a return of the principal, but rather the final interest payment ($600 annual coupon for 15 years, with three years already passed, so 12 years of coupon payments). The investor received $10,300, which includes both the face value of the bond ($10,000) and the interest from the last coupon payment before maturity ($300). Since the investor held the bond for more than a year, the $300 would typically be taxed as a long-term capital gain, making option C) correct.