Say I am considering two different 2-year CD's both with the same yield to maturity but one is sold under par (since its interest rate is below market rates), the other above par (since its rate is above market). For concreteness, let me make up some numbers that are not accurate but allow me to be specific: Say the current market rate for
2-year CD's is 3%. The first CD has a face value of $1000, it pays a rate of 2% ($20 interest per year) and sells for $900; the second one has a face value of $1000, it pays a rate of 4% ($40 interest per year) and it sells for $1100.
- I am assuming that during the time that I hold the CD's, I pay regular tax rates on the income received. When the first CD matures after 2 years, I have a capital gain on the difference 00 - 0 0. When the second CD matures after 2 years, I have a capital loss of 00 - 00 = 0. Is this correct?
- Does it matter if the CD is held to maturity, or would the same considerations apply if it were sold before maturity, in which case the sales price of the CD's would not necessarily be 00?
- Given, in this example, that the yield to maturities are the same, would it be beneficial to purchase the second CD and not the first since you have to pay capital gains tax on the first one but get to claim a loss on the second one, or, in practice, would the yields to maturity be reflective of the capital gains tax/loss that you have at the end?
Thanks.