Series 7 Exam Question 278: Answer and Explanation

Question: 278

Duke Wallwalker purchased an LTSBR Corporation convertible bond at 95 on January 20, 2018. The bond is convertible at $40, and the investor converts his bond into stock on January 21, 2021. If the bond is trading at 104 and the common stock is trading at $42, for tax purposes, these transactions will result in

• A. a $10 gain
• B. a $10 loss
• C. a $90 gain
• D. neither a gain nor a loss

Correct Answer: D

Explanation:

D. There are no tax consequences to Duke for converting a bond into shares of common stock. In order for Duke to have a taxable gain or loss, the shares Duke received as a result of his conversion to common stock must be sold.