Understanding Bank-Qualified Municipal Bonds: Tax Benefits for Commercial Banks

Which TWO of the following statements are TRUE concerning bank-qualified municipal bonds?I To qualify, the municipality may only issue up to $10,000,000 every six monthsII To qualify, the municipality may only issue up to $10,000,000 annuallyIII Commercial banks may receive a 70% tax deduction of the interest costsIV Commercial banks may receive an 80% tax deduction of the interest costsI and IIII and IVII and IIIII and IV

II and IVBank-qualified bonds are issued by small municipalities and, to qualify, a municipality may only issue up to $10,000,000 annually. This is done to encourage commercial banks to invest in locally issued municipal securities. Commercial banks that purchase this type of security are permitted to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds.

The correct answer to this question is option I and III.

Bank-qualified municipal bonds are a type of bond issued by a municipality that allows commercial banks to receive certain tax benefits. The defining characteristics of bank-qualified municipal bonds are:

I. To qualify as bank-qualified, the municipality may only issue up to $10,000,000 every six months.

III. Commercial banks may receive a 70% tax deduction of the interest costs.

Option II is incorrect because it states that the municipality may only issue up to $10,000,000 annually, which is not accurate.

Option IV is incorrect because it states that commercial banks may receive an 80% tax deduction of the interest costs, which is also not accurate. The correct percentage is 70%.

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