Taxes & Tax Shelters - Taxation of Muni Bonds

Question 1

The formula for the equivalent taxable yield =

Answer 1

= tax free yield / (100% - tax bracket %)

Question 2

For muni bonds, if the bond is issued at a discount, the discount _____ be accreted on a straight-line basis over the life of the bond

Answer 2

MUST

Question 3

For muni bonds, if the bond is issued at a premium, the premium ______ be amortized on a straight-line basis over the life of the bond.

Answer 3

MUST

Question 4

For muni bonds, if bought on the secondary market, the premium _____ be amortized, which _____ reported amount of non-taxable interest income

Answer 4

must be amortized, reduces reported amount of non-taxable interest income –> also reduces the cost basis

Question 5

If muni bond is purchased in the secondary market at a discount, the discount ____ be accreted; any “market discount” is treated as _____ interest income received

Answer 5

MAY; any market discount is treated as taxable interest income received

Question 6

For a discount muni, the ultimate yield, if held to maturity and considering taxes, will be somewhat ____ than the basis (YTM); for a premium muni, the ultimate yield, when considering taxes, will _____ the basis (YTM)

Answer 6

for discount will be somewhat less, for premium will = the ytm

Question 7

Capital gains from muni bonds are taxable at the ___, ___, and ___ levels; interest income is not taxable at the ____ level

Answer 7

capital gains taxable at every level (fed, state, and local); interest income only at state and local (if not a resident)