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Simple English definitions for legal terms
income-basis method
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A quick definition of income-basis method:
The income-basis method is a way to figure out how much money you can make from a certain investment. Instead of just looking at the amount of money you put in, this method also takes into account how much interest you will earn. This helps you get a better idea of how much you can expect to earn overall.
A more thorough explanation:
The income-basis method is a way to calculate the rate of return on a security. Instead of using the face value of the security, this method uses the interest and price paid for the security.
For example, let's say you buy a bond for $1,000 that pays 5% interest annually. Using the income-basis method, you would calculate your rate of return based on the $50 in interest you receive each year, rather than the $1,000 face value of the bond.
Another example would be if you bought a stock for $50 that pays a dividend of $2 per share annually. Using the income-basis method, you would calculate your rate of return based on the $2 in dividends you receive each year, rather than the $50 purchase price of the stock.
The income-basis method is useful because it takes into account the actual income generated by the security, rather than just the face value or purchase price. This can give a more accurate picture of the rate of return on an investment.