Given the following bond information: Issuer, coupon, maturity, price and yield:
Bombardier 7.350 2024-Dec-22 107.00 6.56
What would be the taxable income on this bond if it were purchased at this price on December 20th and sold a year later for a price of 103.00? Assume face value of $10 000 and a semi-annual coupon payment.

Question

Quizplus · Accepted Answer

To calculate the taxable income on this bond, we need to first calculate the amount of interest earned and the capital gain/loss that occurred.

Interest earned: 
The coupon payment is semi-annual, so it is $10,000 x 7.35% x 6/12 = $367.50 for each payment. There are two payments in a year, giving us an annual interest income of $735.

Capital gain/loss: 
The bond was purchased for $107.00 and sold for $103.00 a year later. 
The purchase price of the bond is $107.00 x $10,000 = $1,070,000. 
The sale price of the bond is $103.00 x $10,000 = $1,030,000. 
Therefore, the capital loss is $1,070,000 - $1,030,000 = $40,000.

Since the bond was held for less than one year, the capital loss is considered a short-term capital loss.

Therefore, the taxable income would be the interest earned ($735) minus the capital loss ($40,000/2 = $20,000) which gives us a taxable capital loss of $200 and interest of $735.

Given the Following Bond Information: Issuer, Coupon, Maturity, Price and Yield