Question

several years ago you purchase a zero coupon treasury bond. at the end of the last year its YTM was 4% and it had 15 years until maturity. at the end of this year the YTM had fallen to 2% and you decide to sell it. what is your federal tax liability? assume a marginal tax rate of 25% and long term capital gains tax rate is 15%.

Answer 1

Capital gain is recognized based on difference between selling price and basis. Selling price is bond price calculated using 14 years to maturity and 2% YTM, Basis is bond price at 15 years to maturity and 4% YTM. Capital gains is:

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%
Capital gain tax			$   30.39

Federal tax liability is $30.39

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