Capital gains

Definition

Capital gains are the profits realized from the sale of an asset when its selling price exceeds its purchase price. In finance, these can be crucial in understanding the returns on investments such as bonds and stocks.

5 Must Know Facts For Your Next Test

1. Capital gains can significantly impact the overall return on a bond investment.
2. Interest rate fluctuations can affect the market value of bonds, leading to potential capital gains or losses.
3. Capital gains are subject to taxation, which can influence an investor's net return.
4. Long-term capital gains usually have a lower tax rate compared to short-term capital gains.
5. Understanding capital gains is crucial for managing investment portfolios and assessing risk.

Review Questions

• How do interest rate changes impact the potential for capital gains in bond investments?
• What is the difference between long-term and short-term capital gains in terms of taxation?
• Why is it important to consider capital gains when evaluating the performance of an investment portfolio?

Related terms

Yield:

The income return on an investment, typically expressed annually as a percentage of the purchase price.

Interest Rate Risk:

The potential for investment losses due to fluctuating interest rates.

Default Risk:

The possibility that a bond issuer will fail to make required payments, affecting both interest income and potential capital gains.