STOCKS, BONDS, AND
MUTUAL FUNDS
McGraw-Hill/Irwin
Chapter
Twenty One
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
LEARNING UNIT OBJECTIVES
LU21-1: Stocks
1.
Read, calculate, and explain stock quotations.
2.
Calculate dividends of preferred and common stocks; calculate return
on investment.
LU 21-2: Bonds
1.
Read, calculate, and explain bond quotations.
2.
Compare bond yields to bond premiums and
discounts.
LU 21-3: Mutual Funds
1.
Explain and calculate net asset and mutual fund commissions.
2.
Read and explain mutual fund quotations.
21-2
STOCKS
Stock –
Common stock –
shares of ownership in a
company
stock that allows owners to have
voting rights
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
21-3
STOCKS
Stockholders
Dividends –
payments to shareholders
from profit
Elect
Board of Directors
Elect
Officers of Corporation
Dividends in arrears payments owed to
cumulative preferred
shareholders
21-4
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
21-5
STOCK QUOTATIONS IN NEWSPAPERS
21-6
STOCK QUOTATION CALCULATIONS
Stock yield =
Annual dividend per share
Today’s closing price per share
Earnings per share =
=
$1.21
$39.09
=
3.1%
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
Annual earnings per share
=
$39.09 = 17
$2.30
21-7
DIVIDENDS ON PREFERRED AND
COMMON STOCK
The stock records of Jason Corporation show the following:
Preferred stock issued: 20,000 shares.
In 2014, Jason paid no dividends.
Preferred stock cumulative at $.80 per share. In 2015, Jason paid $512,000 in
dividends.
Common stock issued: 400,000 shares.
2014
Dividends paid
0
Preferred stockholders
Paid:
0
Owe: 20,000 x $.80 = $16,000
Common Stockholders
0
Dividends paid
Paid for 2014
2015
$512,000
16,000
Paid for 2015
16,000
32,000
Total dividend
512,000
Paid preferred for ‘14 & ’15 -32,000
Common Stockholders
$480,000
$480,000
= $1.20 per share
400,000 shares
21-8
RETURN ON INVESTMENT
Suppose you bought 200 shares of General Mills stock at $39.09 and sold them 1
year later at $41.10. With a 1% commission rate buying and selling the stock and a
current $1.21 dividend per share in effect, what was your return on investment?
Bought
200 shares at $39.09 =
$7,818.00
Commission at 1% =
78.18
Total cost
$7,896.18
Total receipt
Total cost
Net Gain
Dividends
Total Gain
$8,137.80
-7,896.18
$241.62
+ 242.00(200 x $1.21)
$483.62
Sold
200 shares at $41.10 =
Commission at 1%
=
Total cost
$8,220
- 82.20
$8,137.80
$ 483.62
$7,896.18
6.12% rate of return
21-9
BOND QUOTATIONS IN NEWSPAPERS
Yearly interest = Face value of bond x Stated yearly interest rate
$56.50
=
$1,000
x
.0565
21-10
BOND QUOTATIONS IN NEWSPAPERS
Yearly interest:
Cost of bond:
=
$56.50 =
$995.90
(.0565 x $1,000) =
(.9959 x $1,000)
5.69% = 5.7%
21-11
CALCULATING BOND YIELDS
Bond yield =
Total annual interest of bond
Total current cost of bond at closing
Example:
Jim Smith bought 5 bonds of Coke at the closing price of 99.59. What is Jim’s
interest? (Remember that in dollars 99.59 is $995.90.)
5 bonds x $56.50 interest per bond per year
=
5 x $995.90
$282.50
$ 4979.50
= 5.7%
21-12
WHY INVESTORS CHOOSE
MUTUAL FUNDS
Diversification
Professional management
Liquidity
Low fund expenses
Access to foreign markets
21-13
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
21-14
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 ½% or less
NAV + commission %
(Buy from a broker)
21-15
MUTUAL FUND QUOTATIONS IN
NEWSPAPERS
FUND
Net
YTD
3-Yr.
% Ret
% Ret.
8.9
71.6
NAME
NAV
Chg
Grln P
13.82
-0.06
• NAV plus the sales commission
• Net Chg >Changes in NAV versus the previous day
• YTD % Ret > Fund return this year
21-16