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

Example on cash flow diagram, (a) A usual cash flow diagram will incorporat...

(a) A usual cash flow diagram will incorporate the following. If you are short the CDO and then you receive a fixed amount at the initial point t o . After that you make paymen

Risk return relationship, RISK RETURN RELATIONSHIP A business operates...

RISK RETURN RELATIONSHIP A business operates in a market environment, which is not within its control. It is exposed to several dangers from the internal with external sources

Capital budgeting, Serene Hall ?? Assignment As a consequence of the high l...

Serene Hall ?? Assignment As a consequence of the high levels of stress being recorded in the UK, and a general shift towards a healthier more relaxed lifestyle, as an essential in

Operational cycle, discuss the applicability of the operational cycle in ve...

discuss the applicability of the operational cycle in vegetable growing business in uganda

Organization and management pattern of uti, Organization and Management Pat...

Organization and Management Pattern of UTI UTI has a full-time Chairman with an Executive Trustee reporting to him. The Executive Trustee looks after the Corporate Office, Zona

Evaluation of credit policy, Q. What is Evaluation of Credit Policy? Ev...

Q. What is Evaluation of Credit Policy? Evaluation of Credit Policy: - A credit policy is prepared to maintain the investment in receivables at optimum level. Receivable Turnov

Determinants of the repo rate, Repo rates vary from transaction to tr...

Repo rates vary from transaction to transaction. They depend upon a variety of factors like: Collateral's quality Repo term

Money market instruments, Just as any other financial market, money m...

Just as any other financial market, money market also involves transfer of funds in exchange for financial assets. Because of the nature of the money market, the

Sensitivity analysis, A division of Saron plc is considering introducing a ...

A division of Saron plc is considering introducing a new product.  The product is the result of work undertaken by the division's research and development department - the expendit

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