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.

1. 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 $1000 - $900 $100. When the second CD matures after 2 years, I have a capital loss of $1100 - $1000 = $100. Is this correct?

2. 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 $1000?

3. 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.

1. 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 $1000 - $900 $100. When the second CD matures after 2 years, I have a capital loss of $1100 - $1000 = $100. Is this correct?

2. 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 $1000?

3. 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.

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