"A $10,000 municipal bond with 10 years to maturity is purchased in the primary market at 105. The bond is sold after 4 years at 105. The taxable gain or loss is a:"

2 point capital gain

Explanation:

Every municipal bond that is purchased at premium is subject to straight line depreciation, whether the premium be trading premium or original issue premium.

Here the premium is 5 points = 105 - 100

Which shall be amortised over its useful life of 10 years.

Thus, for each year 1/2 point is amortised without allowing any tax deduction.

Thus, after 4 years total amortisation =

Thus, value at end of year 4 = 105 - 2 = 103 basis point.

Further the selling amount = 105 basis point.

Thus, 105 - 103 = 2 basis point shall be taxable.

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correct, but each time you dont pay the price of the penalty can increase.