Question

An investor buys a pure-discount bond, holds it to maturity, and receives its par value. For tax purposes, the increase in the bond's value ismost likelyto be treated as:

A. a capital gain.
B. interest income.
C. tax-exempt income.

Answer 1

The increase in the value of a pure-discount bond held to maturity is most likely considered interest income, as it compensates the investor for lending money to the issuer. Thus, the option B is the correct answer.

Step-by-step explanation:

When an investor buys a pure-discount bond and holds it to maturity, the increase in value over the purchase price is most likely to be treated as interest income for tax purposes. This stems from the fact that the investor essentially lent money to the issuer and is being compensated for that with the return that accrues over the life of the bond. Unlike with stocks, where profits from the sale generally result in capital gains, the profit from a bond held to maturity is seen as a payment for the use of the investor's capital, hence the interest.