Today Juanita purchases a 15year 7 bond of the Sunflower Cor

Today, Juanita purchases a 15-year, 7% bond of the Sunflower Corporation issued four years ago at par. She purchases the bond as an investment at a discount from the par value. If she sells the bonds two years from now, explain why some or all of the gain may be ordinary income.

Solution

Ordinary income is composed mainly of wages, salaries, commissions and interest income from bonds, and it is

taxable using ordinary income rates. This type of income differs from capital gains in that it can only be offset with

standard tax deductions, while capital gains can only be offset with capital losses.

As four years back she purchases the bond at 7% which is at par in gain or loss of the sunflower corporation.

She purchases the bond as investment at disount from the gain or loss that exists at that time.

though she sells the bond after 2 yrs , since she may be at loss in previous yrs so the income that she get after 2yrs will be either equal to the capital she paid or still in loss or gain