Question

"A $10,000 municipal bond with 5 years to maturity is purchased in the primary market at 105. The bond is sold after 2 years at 103. The taxable gain or loss is:"

Answer 1

Taxable loss is $200

Step-by-step explanation:

The cash paid for acquiring the municipal bond is 105% of $10,000 which is $10,500(105%*$10,000.

However, after 2 years the municipal bond was sold at 103% of the face value, in other words, the sales proceeds received is $10,300(103%*$10,000)

Conclusively, the loss on the sale of the municipal bond is the difference between the amount paid initially and the amount received thereafter i.e -$200($10,300-$10,500)