Legal Definitions - income-basis method

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.