Confused on tax query questions

CFA Level III Equities
#1

Jay then proceeds with the tax analysis of the two bond positions for which he has been
responsible (Exhibit 1). While both positions exhibit similar characteristics, Jay thinks
that during the next year, Position A will depreciate in value, while Position B will slightly
appreciate.

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Jay explains that it is critical to understand whether the client has a tax-exempt or
taxable status before deciding which position to close. He explains that if an investor is tax exempt, they will be more motivated to liquidate Position A. He also adds that the
reason for this motivation is due to a tax loss harvesting strategy.

Regarding the two bond positions, Jay is incorrect in:
A. claiming that a tax-exempt investor will be motivated to sell Position A.
B. stating that tax loss harvesting strategy is the reason to liquidate Position A.
C. claiming that the tax status is critical before deciding which position to liquidate.

The answer is B and I understand why. But I don’t get answer choice A. Why is this correct? If someone is not going to get taxed wouldn’t they want to make a profit from their position? The answer key says "While a tax-exempt investor will be motivated to sell Position A, they will do it due
to their belief that, in the future, the market value of the position will go down and
thus they will only be able to sell it at a lower price. "

#2

A tax-exempted investor would not pay for gains. Thus, he/she will choose to liquidate Portfolio A to achieve the gain before it goes to loss.

#3

Assuming we have no issues with credit risk and par is 10m

Position A
N = 5 PV = -11.5 PM = 0.7 FV = 10 CPY YTM = 3.66%

Position B
N = 5 PV = -8.8 PM = 0.7 FV = 10 CPY YTM = 10.18%

Position A is offering loweing returns and "Jay thinks that during the next year, Position A will depreciate in value " (quoitation added later)

#4

@Okachiang - not sure your statement would be correct here “Thus, he/she will choose to liquidate Portfolio A to achieve the gain before it goes to loss”- that is an assumption. The question gives no indication that it will go for a profit before it goes to a loss. We don’t know this.

#5

It says that the Position A will depreciate in the next year. And the investor is tax-exempted. There’s no reason for not liquidating Position A especially form the perspective of tax.