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Discuss the two components that determine the return on investment. The components are (1) dollar...

Question:

Discuss the two components that determine the return on investment. The components are (1) dollar income-interest or dividend paid during the holding period and (2) the change in the value of investment.

Return on Investment:

Investors purchase the security of another (whether it debt-security or an equity-security) for earning return over it. The interest of an investor in a debt-security is not limited to the interest income attached to it.

Answer and Explanation:

Investors purchase the security of another (whether it debt-security or an equity-security) for earning return over it. The interest of an investor in a debt-security is not limited to the interest income attached to it. It is purchased to earn a fixed income over the holding period which is called interest income and the difference in the market price which would bring an additional income when it is sold.

Interest Income: It is the fixed periodic expected income that would always accrue to the investor during the holding period. This is an important factor in purchasing debt-security. Riskier companies provide a higher interest rate.

Change in the market value of investment This income is realized when the investment is sold above the purchase cost. The security of a fair company is traded at a higher value in the market hence it would bring an additional income for the investor due to change in the market value of the investment.


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