Which security is most likely to provide a capital gain if held to maturity?

A capital gain occurs when a security is sold (or matures) for a higher price than its purchase price. A corporate bond bought at a discount has a purchase price below its face value (par value). When this bond is held to maturity, the issuer repays the full face value. This difference between the higher maturity value and the lower purchase price represents a guaranteed capital gain, assuming the issuer does not default. The other options do not offer this built-in capital gain structure.

B. Preferred shares have no maturity date. If bought at par, there is no inherent capital gain; returns come from dividends.

C. Common shares have no maturity date and their price fluctuates. A capital gain is possible but not guaranteed or structurally built-in.

D. A bond bought at a premium (above face value) and held to maturity will result in a capital loss, not a gain.

1. Canadian Securities Institute. (2023). Investment Funds in Canada Course Textbook. Chapter 3: The Canadian Securities Industry. Section on "Fixed-Income Securities".

2. Bodie, Z., Kane, A., & Marcus, A. J. (2021). Investments (12th ed.). McGraw-Hill Education. Chapter 14: "Bond Prices and Yields," discusses the relationship between bond prices, coupon rates, and yields, explaining discount and premium bonds.

3. Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education. Chapter 7: "Interest Rates and Bond Valuation," explains how discount bonds appreciate towards par value as they approach maturity.