A
Ayushi Arora
Member
Hi, I am not clear with one of the example which is part of course notes.
I am adding the example here:
In a particular market there are two investors. Investor A is subject to tax at 50% on income and 20% on capital gains. Investor B is subject to tax at 40% on income and 30% on capital gains. There are also two types of investment available, each offering a similar total pre-tax return and similar features, except that: • Investment X provides a low level of income • Investment Y provides a high level of income. Assuming that Investors A and B have similar levels of wealth and that the quantity of Investment X available is similar to the quantity of Investment Y, which type of investment is Investor B likely to choose?
I am clear with the logic behind both Investors preferring Investment X. However not clear how Investor A willing to pay more for Investment X makes Investor B choose Investment Y instead of Investment X. Please Explain this.
Thanks
Ayushi
I am adding the example here:
In a particular market there are two investors. Investor A is subject to tax at 50% on income and 20% on capital gains. Investor B is subject to tax at 40% on income and 30% on capital gains. There are also two types of investment available, each offering a similar total pre-tax return and similar features, except that: • Investment X provides a low level of income • Investment Y provides a high level of income. Assuming that Investors A and B have similar levels of wealth and that the quantity of Investment X available is similar to the quantity of Investment Y, which type of investment is Investor B likely to choose?
I am clear with the logic behind both Investors preferring Investment X. However not clear how Investor A willing to pay more for Investment X makes Investor B choose Investment Y instead of Investment X. Please Explain this.
Thanks
Ayushi