How the Market Quotes a Treasury

Rule 30 of 32 in this unit2.1.2

2.1.2 Debt Instruments

SIE outline 2.1.2

How the Market Quotes a Treasury

Bills trade on a discount basis. Notes/bonds quote in 32nds: 98:16 means 98.5% of par, not $98.16.

The method for this kind of question

Term + payment form names the instrument.

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Above the exam

A resident of State A buys a general obligation bond issued by a city in State B. The bond was issued in 2015. How is the interest taxed at each level, and could the city compel a tax levy if it defaulted?

A. Federally exempt, State A taxable, since the buyer is outside the issuer's own state; and yes, the city could compel a tax levy or legislative appropriation on default B. Exempt from all three levels of tax; and no, only a revenue bond's issuer could compel a levy C. Fully taxable at all three levels; and yes, the city could compel a levy D. Federally exempt, State A taxable; but no, a general obligation issuer can never be compelled to raise taxes after default

How sure are you?

Sure Fairly sure Guessing

Correct: A. Federal exemption follows the bond issued after 1953 regardless of the buyer's residence; state exemption usually requires the bond to be from the buyer's own state, which this is not; and a general obligation issuer's default remedy is compelling a tax levy or appropriation, tied to its own taxing authority.

B. The triple-exemption assumption is exactly the trap the source material names; State A taxation applies since the bond is from a different state.

C. Federal exemption still applies to a post-1953 municipal bond regardless of the buyer's state.

D. This directly contradicts the source's own stated remedy, that holders may compel a tax levy or legislative appropriation on default.

Unit: SIE outline 2.1.2

Next ruleExempt From State and Local Tax

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