Final answer:
In a municipal bond fund, dividends are often tax-exempt while capital gains distributions are taxable. A share of stock represents ownership in a company, and capital gains are realized when the stock is sold for more than the purchase price.
Step-by-step explanation:
If a customer purchases shares in a municipal bond fund, the following statements hold true:
- Dividends are often exempt from federal income tax, but whether they are entirely tax-free depends on the investor's tax situation and if the bonds are held by a fund that invests in one's own state of residence.
- Capital gains distributions are taxable. When a fund sells securities that have increased in value, the fund realizes a capital gain, and when these gains are paid out to investors, they become taxable events.
A share of stock represents partial ownership in a company. When a firm initially sells stock, it receives money directly from the sale, but it does not receive money from subsequent trading between investors on the stock market. A dividend is a distribution of a portion of the company's earnings paid to shareholders. A capital gain is the increase in the value of an investment between when it is purchased and when it is sold.