Question

A bond had an issue price of $1,000, a redemption price of $1,000, a coupon rate of 8%, and pays semiannual interest on Feb 1 and Aug 1. On Oct 1, 2017, an investor buys the bond for $1,040. The investor sells the bond on May 1, 2019 for $1,050.

a. What is the investor’s basis in the bond?

b. If the investor is a cash basis taxpayer how much interest income must the investor include in income in 2017, 2018 and 2019?

c. If the investor is an accrual basis taxpayer how much interest income must the investor include in income in 2017, 2018 and 2019?

d. How much capital gain or loss would the investor realize in 2019?

Answer 1

a. Investors' basis in the bond is the purchase price paid by the investors for acquiring the bond. Thus in this case basis in the bond will be $1040.

b. Interest inocme in case of Cash Basis Taxpayer

Year	Feb-01	Aug-01	Total Interest
2017	-	-	-
2018	40.00	40.00	80.00
2019	40.00	-	40.00

c. Interest income in case of accrual basis taxpayer

Year	No. of months	Interest
2017	3.00	20.00
2018	12.00	80.00
2019	4.00	26.67

d.

Capital Gain = Sale Price - Basis in Bond = 1050 - 1040 = 10