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CHAPTER 7

sons. One, market discount bonds grant the investor an automatic call protection since their coupon rates are relatively low when compared with current market interest rates. Two, the bond issuers must gener- ally pay at least face value when the bond is redeemed, which would increase the issuer’s cost of the call. All types of bonds, including Treasury bonds and municipals, may be sold at deep discount. The accessibility to market discount bonds depends on the current interest rate. The more the interest rate rises, the more discount bonds you will be able to find; the reverse is also true.

For tax purposes, any gain between the market discount and the resulting value from the sale, redemption, or maturity of the bond will be taxed as ordinary interest income, instead of capital gains, as long as the taxable bonds were issued after July 18, 1984 or the bonds were issued on or before July 18, 1984 and purchased on the open market after April 30, 1993. If there is a gain greater than this amount, it will be taxed at capital gains tax rates. Likewise, any loss will be treated as a capital loss. For other taxable bonds, any gain from the sale, redemp- tion or maturity of the bonds will be taxed at capital gains rates.

For those cash-basis bondholders, an election may be made to include the accrued market discount each year in their gross income, and have it taxed annually. However, this usually doesn’t happen. If the investor has any unused interest expenses that may only be deducted against interest income, this choice would be helpful.

Any tax-exempt market discount bonds (munis) that were pur- chased after April 30, 1993 and that had a gain between the market discount and the resulting value from the sale, redemption, or matu- rity of the bond will be taxed as ordinary interest income, instead of a capital gain.

INFORMATION ABOUT BONDS

You can find information about bonds in the same places you would find information about stocks and mutual funds. Below are examples of how to read the quotes for different types of bonds as they may appear in a publication such as the Wall Street Journal.

In the example below, there are three bond quotes. For the first quote, we see that a corporate bond for ABC company is being

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