Understanding Stocks, Bonds, and Mutual Funds: Key Concepts and Calculations

1. Chapter 21 Stocks, Bonds, and Mutual Funds

2. #21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives Stocks LU21.1 • Read and explain stock quotations • Calculate dividends of preferred and common stocks; calculate return on investment

3. #21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives Bonds LU21.2 • Read and explain bond quotations • Compare bond yields to bond premiums and discounts

4. #21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives Mutual Funds LU21.3 • Explain and calculate net asset and mutual fund commissions • Read and explain mutual fund quotations

5. Stocks Common Stock - Stock that allows owners to have voting rights Stock - Shares of ownership in a company Preferred Stock - Does not allow voting rights, but gives preference over common stockholders in dividends Cumulative preferred stock - entitles its owners to a specific amount of dividends in 1 year

6. Stocks Dividends - Payments to shareholders from profit Stockholders Elect Board of Directors Elect Officers of Corporation Dividends in arrears - Payments owed to cumulative preferred shareholders

7. How Stocks Are Traded Stock exchanges - An orderly trading place for stock. Stockbrokers - people who buy and sell stock on the floor of the exchanges. They charge a commission for trading stocks.

8. Stock Quotations in Newspaper’s 52 weeks YLD VOL HI LO STOCK (SYM) DIV % PE 100s LAST 43.95 32.85 Home DPT .90 2.3 14 178416 39.92

9. Stock Quotation Calculations Stock yield = Annual dividend per share = $.90 = 2.3% Today’s closing price per share $39.92 Earnings per share = Annual earnings . Total number of shares outstanding *Earnings Per Share are not listed on the stock quote PE Ratio = Closing price per share of stock = $39.92 = 14 Annual earnings per share $2.85

10. Dividends on Preferred and Common Stock Stock records for You Corporation show the following: Preferred stock issued: 20,000 shares. In 2009, Sony paid no dividends Preferred stock cumulative at $.80 per share. In 2010, Sony paid $512,000 in Common stock issued: 400,000 shares dividends. 2009 Dividends paid 0 Preferred stockholders Paid: 0 Owe: 20,000 x $.80 = $16,000 Common Stockholders 0 2010 Dividends paid $512,000 Paid for 2009 16,000 Paid for 2010 16,000 32,000 Total dividend 512,000 Paid preferred for ‘09 & ’10 -32,000 Common Stockholders $480,000 $480,000 = $1.20 per share 400,000 shares

11. Return on Investment Suppose you bought 200 shares at $21.25 and sold them 1 year later at $27.50. With a 1% commission rate buying and selling the stock and a current $.21 dividend per share in effect what was your return on investment? Bought 200 shares at $21.25 = $4,250.00 Commission at 1% = 42.50 Total cost $4, 292.50 Sold 200 shares at $27.50 = $5,500 Commission at 1% = - 55 Total cost $5,445 Total receipt $5,445.00 Total cost -4,292.50 Net Gain $1,152. 50 Dividends + 42.00 (200 x $.21) Total Gain $1,194.50 $1,194.50 $4,292.50 27.83% Return on Investment

12. Bond Quotations in Newspaper’s Current Net Bonds Yield Vol. Close change IBM 8 3 19 7.0 5 120 1 +1 8 2 *Bonds are stated as a percent of face amount Yearly Interest = Face value of bond x stated yearly interest rate $83.75 = $1,000 x .08375

13. Bond Quotations in Newspaper’s Current Net Bonds Yield Vol. Close change IBM 8 3 19 7.0 5 120 1 +1 8 2 Yearly interest: = $83.75 = (.08375 x $1,000) = .0695 = 7% Cost of bond: $1,205 (1.205 x $1,000)

14. Calculating Bond Yields Bond yield = Total annual interest of bond Total current cost of bond at closing Sue Lawson bought 5 bonds of IBM at the closing price of 1201/2. What is Sue’s interest? (Remember that in dollars 120 ½ is $1,205) 5 bonds x $83.75 interest per bond per year $418.75 = 6.95% = 7% $ 6,025 5 x $1,205

15. Why Investors Choose Mutual Funds Diversification Professional management Liquidity Low fund expenses Access to foreign markets

16. Net Asset Value Mutual Fund - A portfolio of stocks and/or bonds Net Asset Value (NAV) - the dollar value of one mutual fund share NAV = Current market value of fund’s investment - Current liabilities Number of shares outstanding

17. Commissions: Mutual Funds Classification Commission charge Offer price to buy No-load (NL) fund No sales charge NAV (Buy directly from investment company) Low-load (LL) fund 3% or less NAV + commission % (Buy directly from investment company or from a broker) Load fund 8 1 % or less NAV + commission % (Buy from a broker) 2

18. Mutual Fund Quotations in Newspaper’s FUND YTD NAME NAV CHG % RET Grln P 18.43 -0.09 4.1 Name of Fund Fund return this year NAV plus the sales commission Changes in NAV versus the previous day

19. Problem 21-19 A. PE= $29.25/ $4.80 = 12 B. Yield = $1.40/ $59.25 = 2.4%

20. Problem 21-21 Today: 5 x $1,008.75 (1.00875 x $1,000) = $5,043.75 Yesterday: 100 7/8 – 1 1/8= 99 6/8 = 99 ¾ 5 x $997.50 (.9975 x 1,000) = -4,987.50 $ 56.25

21. Problem 21-23 79 ¼% = 79.25% = .7925 x $1,000 = $792.50 $57.50/ $792.50 = 7.3% (5 ¾% = 5.75% = .0575 x $1,000 = $57.50)

22. Problem 21-24 A. 88 ¼% = 88.25% = .8825 x $1,000 = $882.50 $882.50 x 5 = $4.412.50 + $25.00 = $4,437.50 B. 1175 x $1,000 = #117.50 x 5 = $587.50 C. $117.50/ $883.50 = 13.3%

23. Problem 21-26 • $ 43.62 x 200 $8,724.00 + 261.72 (.03 x $8,724) $8,985.72 total cost • $43.62 Thursday price - 2.08 (Wed. price $2.08 lower) $41.54 Wed. price per share x 200 $8,308.00 + 249.24 (.03 x $8,308) $8,557.24 total cost

24. Problem 21-29 $1,585 dividends received X .28(tax bracket) $443.80