What is market discount of municipal bonds? Market discount on municipal bonds or any tax exempt bonds can arise if the municipal bonds are issued at par or at a premium and is later purchased in the secondary market at a price that is less than par.
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Even though the interest paid on municipal bonds is tax exempt, a holder can recognize capital gains or capital losses that are subject to federal income tax on the sale of such municipal bonds, just as in the case of a taxable bond. How to calculate municipal bond capital gains or losses?
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What is a municipal bond premium? The municipal bond premium is the amount in excess of the face value or par value of the municipal bond that the bond investor purchases. When a municipal bond investor purchases a municipal bond at premium, he/she pays a higher price for the municipal bond than the par value or face value. Below are the tax implications and tax treatments of municipal bond premiums.
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Municipal bonds are commonly referred to as tax exempt bonds because municipal bonds have many tax advantages. However, not all municipal bonds are tax free. In most cases, there are tax consequences in investing in municipal bonds.
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If tax exempt bonds are originally issued at a price less than par (as distinguished from a subsequent sale of a previously-issued bond), the difference between the issue price of such tax exempt bonds and the amount payable at the maturity of the bond is considered " original issue discount " ( or OID).
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