Capital gain or loss, Financial Management

Assignment Help:

An Investor can receive income from this source when the bonds purchased at discount are held up to maturity or when he sells the bond before maturity date at a price above the purchase price. For example, an Investor purchases a Rs.100.00 par value bond for Rs.95.40.  At the time of maturity, there would be a capital gain of Rs.4.60 (Rs.100.00 - Rs.95.40). Let us say that the purchase price is more than par value; then the investor would bear capital loss. For example, assume that the investor purchased bond at Rs.105.40 i.e. more than par value. In this case investor will bear Rs.5.40 (Rs.105.40 - Rs.100.00) capital loss.

In the case of a callable bond the investor has a capital gain when the call price is more than the purchase price of the bond. For example, assume that the bond given in the previous example is called at the Rs.100.95. Then, the capital gain will be Rs.6.10 (Rs.101.50 - Rs.95.40). If the call price is less than the purchase price then the investor will bear capital loss. For example, assume that in place of Rs.100.95, the call price is Rs.93.20. In this case the investor will bear a loss of Rs.2.20 (Rs.95.40 - Rs.93.20).

In case the bond is sold before maturity or call, there will be capital gain only if the sale price is more than the purchase price. For example, assume that the bond in the above example is sold at a price of Rs.102.00. The capital gain would then be Rs.6.60 (Rs.102.00 - 95.40). If the sale price is less than the purchase price then the investor will bear capital loss. For example, assume that the bond given above is sold at Rs.94.90. In such a situation, the capital loss will be Rs.0.50
(Rs.95.40 - Rs.94.90).


Related Discussions:- Capital gain or loss

Explain the role of commission authorities, Explain the Role of commission ...

Explain the Role of commission authorities Competition Directorate is one of the independent public bodies which help ensure healthy competition between companies which then be

Deficiency in design, Deficiency in Design - This exists when a control ess...

Deficiency in Design - This exists when a control essential to meet the control objective is missing or an existing control isn't properly designed so that even if control operates

Define pro forma financial statements and cash budget, What is the differen...

What is the difference among pro forma financial statements and a cash budget?  Explain why pro forma financial statements are not employed to forecast cash needs. Pro forma inco

Advent of euro affect international diversification strategy, Explain how t...

Explain how the advent of the euro would affect international diversification strategies. Answer: As the euro-zone will have similar exchange-rate policies and monetary, the co

Financial management, using the operating cycle and any other financial man...

using the operating cycle and any other financial management knowledge,discuss the applicability of such cycle to poultry business in Uganda(consider broilers)

Methods of easing cash shortages, Q. Methods of easing cash shortages? ...

Q. Methods of easing cash shortages? There are several techniques which can potentially offset the effects of cash shortages. In the long-term nevertheless the adequacy of cash

Define a currency futures contract, Q. Define a currency futures contract? ...

Q. Define a currency futures contract? A currency futures contract is a standardised contract for the buying or else selling of a specified quantity of currency. It is traded o

Abnormal earnings valuation model, Abnormal Earnings Valuation Model Ab...

Abnormal Earnings Valuation Model Abnormal Earnings Valuation Model is a method to analyse the value of the firm. The value of the firm can be the sum of three components - the

Bond's capital gain yield, A 10-year, 12% semi-yearly coupon bond with a pa...

A 10-year, 12% semi-yearly coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,050. The bond sells for $1,050. (Suppose that the bond has just bee

Compute the discount and premium, Suppose the bid-ask spot prices for one B...

Suppose the bid-ask spot prices for one British pound are $1.50 and $1.60 respectively. 1. Compute the bid-ask prices for one US dollar in terms of British pound. 2. Suppose

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd