Series 7 Exam Question 275: Answer and Explanation

Question: 275

Gerry Goop purchases a new OID municipal zero-coupon for 80. If Gerry holds the bond to maturity, what is his tax consequence?

• A. $0
• B. $200 ordinary income over the time the bond is held to maturity
• C. $200 capital gain
• D. None of the above

Correct Answer: A

Explanation:

A. Municipal original issue discount bonds must be accreted; the discount is treated as part of the investor's tax-free interest. Because these municipal discount bonds must be accreted, the cost basis is equal to the par value, and, as a tax consequence, Gerry will have no losses or gains if he holds the bond to maturity.