Basics Beginner: Investment Earnings

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1.
All investment earnings are taxed the same way.
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False. Long-term capital gains are usually taxed at a lower rate than other forms of income, and most municipal bonds' interest payments are tax-exempt (tax-free).
2.
If you have a capital gain (that is, earn a profit) on an investment that you held for three years, it will be considered a _______.
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Long-term capital gain. Investments that are held for longer than a year and then sold for a profit will earn long-term capital gains.
3.
What are a security's increases in value called after they are sold?
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Capital gains. They are capital gains after they are sold, but paper profit while they are still held.
4.
Companies that pay dividends do not by nature generate capital gains.
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False. Stocks can both pay dividends and appreciate in value, which can produce capital gains upon their sale. Good dividends can attract additional buyers, which results in appreciation of a stock's value.
5.
Zero coupon bonds pay out all of their earnings in the form of capital gains.
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False. Zero coupon bonds do not make interest payments or coupon payments; however, their gain in value to maturity and par value is considered accrued interest.