Income Beginner: Taxes in Bond Investing

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1.
If you are in the 12 percent tax bracket and you are contemplating buying a municipal bond that pays a 7 percent yield, how much would you need to earn on a taxable bond to equal what you would earn on the municipal bond?
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7.96 percentt. According to the formula, tax-free yield/1-federal tax rate = 7/0.88 = 7.96 percent.
2.
What does taxable equivalent yield tell you?
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How much you'd have to earn on a taxable bond to equal what you are earning on a municipal bond. You can use the formula to figure out whether to buy a municipal or a taxable bond.
3.
Assume that you are in the 32 percent federal tax bracket and you pay a 5 percent state tax. What will be your taxable equivalent yield on a municipal bond earning 4 percent?
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6.19 percent.
4.
The tax advantages of Series EE and Series I bonds include all of the following except _______.
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No federal tax on earnings. Unless the bonds are owned by your child or special exclusions for educational expenses apply, you must pay federal taxes on the earnings of your Series EE and Series I bonds. State and local taxes, however, are not paid.
5.
Phantom income is taxable income on an inflation-adjusted bond's coupon interest.
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False. Phantom income refers to taxable income on an inflation-adjusted bond's principal interest.
6.
If you buy a premium bond, you may have to report original issue discount interest on your tax return.
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False. You may have to report interest from original issue discounts if you buy a discount bond, not a premium bond.