How Is Income Earned

How Is Income Earned
Dividends
Dividends represent the profits of a corporation that are distributed to that corporation's shareholders. A dividend is earned when a security is held on the day before "ex-date." The amount of the dividend that will be received is in proportion to the number of shares of the security that are held. A fund that purchases an equity security on or after ex-date is not entitled to the current dividend. Likewise, a fund selling an equity security on or after ex-date is entitled to the current dividend.
Interest Income
Interest income is accrued and posted daily. A mutual fund is entitled to interest income on a debt security at the rate stated in the bond's indenture for each day the security is held. Interest payments are received from the issuer at periodic intervals determined when the security is issued. Payments are usually received monthly, quarterly, or semiannually.
Accretion
Debt securities may be purchased at less than par value, or at a discount. The difference between the purchase amount and the par value is allocated and accounted for as income, or accreted, over the life of the security. Discount is NOT accreted on tax-exempt securities. Accretion of discount is often incorrectly called amortization of discount.
Amortization
Debt securities may be purchased at more than par value, or at premium. When the difference between the purchase amount and the par value is written off over the life of the security, it is said to be "amortized." Premium must be amortized on tax-exempt securities, but the holder of a taxable security has the option of amortizing premium.
Original Issue Discount
Original Issue Discount (OID) arises when a debt security is issued at a price less than the stated par value, and meets certain requirements set by the Internal Revenue Service. The difference between the issue amount and the par amount is accreted over the life of the security.
Realized Gains & Losses
The sale of a security may generate a realized gain or a realized loss. If a security is sold for MORE than the cost at which it is held, a realized capital gain results. If the security is sold for LESS than the cost at which it is held, a realized capital loss is incurred.