Question

For a new issue muni bond purchased at a discount, the cost basis _____ throughout its life.

A) increases gradually over time
B) decreases gradually over time
C) remains constant
D) fluctuates with market conditions

Answer 1

The cost basis for a new issue muni bond purchased at a discount increases gradually over time.

Step-by-step explanation:

The correct answer is A) increases gradually over time. When a new issue municipal bond is purchased at a discount, the cost basis increases gradually over time as the bond approaches maturity. This is because the discount amount is amortized over the life of the bond. The increase in cost basis is realized through an adjustment to the interest income received from the bond.