Question

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%

Answer 1

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.

Answer 2

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.