Question

Several years ago you purchased a zero coupon Treasury bond. At the end of last year its YTM was 4% and it had 12 years until maturity. At the end of this year the YTM has fallen to 2% and you decide to sell it. What is your Federal tax liability for this year? Note: Answer in dollars, rounding to the nearest cent. Assume your marginal tax rate is 25% and the long term capital gains tax rate is 15%

Answer 1

Particulars	Face value	× discount rate	Amount
Selling price	$      1,000	0.757875	$ 757.88
Less: basis	$      1,000	0.555265	$ 555.26
Capital gain			$ 202.61
× capital gain tax rate			15%
Federal taxes payable			$   30.39

Federal taxes payable are $30.39

Selling price discount rate is calculated using rate 2% and period 14 years.

Basis discount rate is calculated using 4% rate and 15 years time.

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