1 What are capital gains Are they different from total retur

1. What are capital gains.? Are they different from total return? 2. Should my tax bracket determine what types of bonds I should invest in? Why? 3. Evaluate this statement: Bonds are very safe investments. They never lose money and always underperform stocks

Solution

Answer 1

Capital Gain: The price due to the difference between the purchase price (P_t–1) and the sale price (P_t) of a share at the end of time t – 1 and t, respectively.

Total return: an equity security’s total return is determined by its price change and dividends.total return represent price change (or capital gain) and dividend income.

Total return, R_t = (P_t – P_t–1 + D_t)/P_t–1

Answer 2

If investor is in high tax bracket: Its better to invest in Municipal Bond, Interest income received by holders of local government bonds called municipal bonds in the United States is often exempt from federal income tax and from the income tax of the state in which the bonds are issued.

If Investor is in Low tax bracket:Its better to invest in company which are providing higher yield as compare to other Bond

Answer 3 This statement is incorrect Bonds are subject to default and they have credit risk.credit risk refers to the risk of loss resulting from the issuer failing to make full and timely payments of interest and/or repayments of principal