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7 Cards in this Set

  • Front
  • Back
Interest on muni bonds
1.Paid semi annually
2.Exempt from fed income tax based on the doctrine "reciprocal immunity
which was applied by the US Supreme Court
3.Most states exempt int WITHIN the state of issue, not bonds issued from other states
-Exception:Commonwealth of Puerto Rico bonds are triple exempt
Corporate equivalent yield
Muni yield/(100%-Inv tax rate)= Taxable equivalent yield
When a municipal is purchased at a PREMIUM and
1.Held to maturity- There will be no tax consequences
2.Sold prior to maturity- The CB is reduced by the amount that has been amortized(written off)
*Does NOT matter if bond was OI or bough t in 2ndary mkt
Municipal bond discount
1.OID- If bought at a discount in an ORIGINAL offereing, they can treat the discount as part of the interest income received, not a CG. This interest income is TAX EXEMPT

2.Secondary mkt discount- Bought at a discount in the secondary mkt, the discount would be treated as ORDINARY INCOME(fully taxable) in the yr the bond is sold

*Discount bonds are more volatile bc they are more sensative to int rate changes than bonds trading at a premium
Exchange from one bond to another. Allow investors to:

1.Upgrade a port by switching into higher rated bonds
2.Extend or shorten time to maturity
3.Inc income or yield
4.realize capital losses for tax purposes.

*Accrued interest is NOT a reason to do a swap
Large buyers of muni bonds:
Individuals,commercial banks and ins companies
T or F
Charitable instititutions, IRAs and pension funds benefit from the tax-exempt status of muni bonds?
They do NOT benefit bc these organizations are tax free or tax deferred