AssignmentTo complete this assignment, please answer the following questions:
Instructions
AssignmentTo complete this assignment, please answer the following questions:
Contingent Interest
1. X Corp issues a bond that is due in 5 years. The bond has no coupon. The investor buys the bond for $100,000. In 5 years, the investor will receive $100,000 times the movement in the S&P 500 from the date the bond was issued until it matures. The most the investor can receive is capped at $200,000, and the investor suffers losses as the S&P goes down until the S&P goes down by 90%. If that happened, the investor will be entitled to receive 10% of their investment back even if the S&P went down by more than 90%. The issuer could have borrowed money for five years at a 5% interest rate.a. How will this instrument be treated for tax purposes?b. Assume that it is redeemed at maturity for $175,000. What is the amount of gain/loss? When and how will it be treated for tax purposes?
Assume that the investor was guaranteed to get her initial investment back at maturity, even if the S&P decreased in value.c. How would the amount received at maturity ($175,000) be treated?
Instructions
AssignmentTo complete this assignment, please answer the following questions:Market Discount, Premium
1. X Corp issues a bond on April 1, 2021, with a maturity date of March 31, 2031. The redemption amount is 100,000, and the bonds were issued to the public. The first price paid for the bond was $55,000, but most of the bonds issued sold for $50,000. The annual yield to maturity on the bond is 7%. The bonds do not have a coupon. Assume that B bought the bond on the date it was issued for $50,000. Assume B sells the bond to D on September 30, for $50,500. Assume D sells the bond to F on December 31, 2021, for $52,000.
a. In computing original issue discount, does every owner of the bond begin the calculation using the same issue or revised issue price?b. How much income did B recognize with respect to the bond in 2021? What was the nature of the income?c. How much income did D recognize with respect to the bond in 2021? What was the nature of the income?
2. X Corp issues a bond on March 1, 2016, with a maturity date of February 28, 2026. The issue price and the redemption amount are 100,000. The bonds have a 6% coupon. On March 1, 2021, C, an accrual basis taxpayer, purchases one of the bonds with a redemption amount of $10,000 for $9,000. C borrows the full $9,000 to purchase the bond. In 2019, C incurs $750 of interest expense.a. Assuming C does not elect to accrue the market discount into income, how much of the $750 is deductible in 2021? If not all, what happens to the excess?
3. What is the definition of bond premium? Are bonds typically issued at a premium?
4. Assume that an individual owns a bond that they purchased for $100,000. The bond has a 10% coupon. The bond will mature in three years and is currently selling for $125,000. What tax planning technique can the investor utilize?
