Yellow Corporation and Green Corporation Enter into a "Type A

question 3

Multiple Choice

Yellow Corporation and Green Corporation enter into a "Type A" reorganization.Raul currently holds a 15-year $100,000 Green bond paying 6% interest.In exchange for his Green bond,Raul receives a 5-year $125,000 Yellow bond paying 5% interest.Raul is happy with the Yellow bond because,even though it pays a lower interest rate,the yield provides slightly more interest than the Green bond,and both bonds mature on the same date.How does Raul treat this transaction on his tax return?

• A)Raul recognizes gain of $25,000 on the exchange ($125,000 - $100,000).
• B)Raul recognizes a $5,000 gain ($100,000 * 6% = $120,000 * 5%;$125,000 - $120,000 = $5,000).
• C)Raul recognizes $1,250 gain ($5,000 * 5% * 5 years remaining on bond).
• D)Raul has no gain because he exchanges a security for a security.
• E)None of the above.

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Definitions:

Long-run Equilibrium

A state in an economy or market where all factors of production and economic variables are balanced, and there are no external pressures forcing change.

MR = MC

The condition under which profit is maximized, where marginal revenue equals marginal cost.

P > MC

Indicates a situation where the price of a good is greater than the marginal cost of producing it, suggesting a potential for profit.

Monopolistically Competitive

A market structure characterized by many sellers offering differentiated products, leading to some degree of market power but still allowing for competition.