When a bond is purchased in the secondary bond market at a discount, the amount of discount treated as interest income when the bond is sold prior to maturity is the:
A)market premium.
B)market discount.
C)accrued market premium.
D)accrued market discount.
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

When a bond is purchased in the secondary bond market at a discount, the amount of discount is treated as accrued market discount. This discount is accreted over the life of the bond and added to the purchase price to determine the bond's tax basis. When the bond is sold prior to maturity, the amount of this accrued market discount that has not yet been included in the taxpayer's income is treated as interest income.

When a Bond Is Purchased in the Secondary Bond Market