Capital gain
Also called: Capital loss · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Class 12, Ch 3 "Money and Banking"
Meaning
A capital gain is the gain an asset holder makes when the asset's price rises. A capital loss is the loss when the price falls. For bonds, the key link is that bond prices move opposite to interest rates. When rates rise, bond prices fall and holders suffer a capital loss. When rates fall, bond prices rise and holders make a capital gain. This risk is one reason people hold money for speculation.
Example
Take the NCERT bond: face value Rs 100, 2 years, 10% coupon. At a 5% market rate it is worth about Rs 109.29. If the rate rises to 6%, its price falls to about Rs 107.33. The holder suffers a capital loss of about Rs 1.96.
Don't confuse with
- Coupon or interest income: the coupon is the regular payment a bond makes. A capital gain or loss comes only from a change in the bond's price.
Related concepts
- Bonds
- Coupon rate
- Present value
- Bond price and interest rate inverse relation
- Zero-coupon bond
- Floating rate bond
- Mark-to-market
- Yield curve
- Inverted yield curve
- Credit rating