CFA Practice Question

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CFA Practice Question

A municipal bond is callable beginning with the fifth coupon date. The call price schedule specifies call prices that decline with each passing coupon payment date, from 107% of par to 100% of par on the maturity date.

I. The call provision makes the timing of the promised cash flows uncertain.
II. The call provision makes the size of the promised cash flows uncertain.
III. The call provision makes the tax status of the interest payments uncertain.
A. I and II
B. I and III
C. I, II and III
Explanation: The maturity date for a callable bond is assigned at the bond issuer's discretion. The timing of the call, if it occurs, will determine the size of the terminal cash flow.

User Contributed Comments 7

User Comment
sarath III: Interest payments are tax exempt for municipal bonds.....
DashingDude I don't think that all municipal bonds enjoy the same tax-free treatment
aakash1108 i agree with is clearly stated in the book that Municipal bonds have been issued without tax exempt returns; however, they are still referred to as "tax exempt bonds"...
bidisha U still have to pay state tax on them
sahilb7 This question has taxed my brain too much already..
janis36 If the bond is called at 107% of par is 7 treated as interest income or capital gains?
Eversar I was under the impression capital gains on muni bonds are taxed? A bond called over par would result in cap gains?
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