Taxation of Municipal Bonds

Question 1

Formula for equivalent Taxable yield

Answer 1

Tax free yield/

100%-Tax Bracket%

Question 2

Formula for equivalent tax free yield

Answer 2

Taxable yield * (100-taxbracket)

Question 3

Is it option to accrete or amortize original issue municipal bonds?

Answer 3

No, required

Question 4

Is it required to accrete discount municipal bonds purchased on the secondary market?

Answer 4

No, optional

Question 5

How are discount municipal bonds sold on the secondary market treated differently than other bond options?

Answer 5

market discount is treated as taxable interest income

Question 6

Are capital gains exempt from taxation for municipal securities?

Answer 6

No, taxable at all levels. Only interest income is tax exempt

Question 7

Do pension plans invest in municipal bonds?

Answer 7

No - municipal bonds have a lower yield because they have lower tax exposure…pension plans are already tax deffered so they gain no benefit