Chapter 21
Stocks, Bonds, and
Mutual Funds
McGraw-Hill/Irwin
©2011 The McGraw-Hill Companies, All Rights Reserved
#21
Stocks, Bonds, and Mutual Funds
Learning Unit Objectives
LU21.1 Stocks
1. Read and explain stock quotations
2. Calculate dividends of preferred and
common stocks; calculate return on
investment
21-2
#21
Stocks, Bonds, and Mutual Funds
Learning Unit Objectives
LU21.2 Bonds
1. Read and explain bond quotations
2. Compare bond yields to bond premiums
and discounts
21-3
#21
Stocks, Bonds, and Mutual Funds
Learning Unit Objectives
LU21.3 Mutual Funds
1. Explain and calculate net asset and
mutual fund commissions
2. Read and explain mutual fund
quotations
21-4
Stocks
Stock - Shares of
ownership in a company
Preferred Stock - Does not
allow voting rights, but gives
preference over common
stockholders in dividends
21-5
Common Stock - Stock
that allows owners to have
voting rights
Cumulative preferred stock entitles its owners to a specific
amount of dividends in 1 year
Stocks
Stockholders
Elect
Dividends Payments to
shareholders from
profit
Board of Directors
Elect
Officers of
Corporation
21-6
Dividends in arrears
- Payments owed to
cumulative
preferred
shareholders
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.
21-7
Stock Quotations in Newspaper’s
52 weeks
YLD
VOL
NET
HI
LO STOCK (SYM)
DIV % PE 100s CLOSE CHG
40.49 17.27 General Electric (GE) 1.24 6.8 8.73 75,537 18.34 1.59
21-8
Stock Quotation Calculations
Stock yield = Annual dividend per share = $1.24 = 6.8%
Today’s closing price per share $18.34
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 = $18.34 = 8.73
Annual earnings per share
$2.10
21-9
Dividends on Preferred and Common Stock
The stock records of Jason Corporation show the following :
Preferred stock issued: 20,000 shares.
In 2011, Jason paid no dividends
Preferred stock cumulative at $.80 per share.
Common stock issued: 400,000 shares
dividends.
In 2012, Jason paid $512,000 in
2011
2012
Dividends paid
0
Dividends paid
$512,000
Preferred stockholders Paid:
0
Paid for 2011
16,000
Owe: 20,000 x $.80 = $16,000 Paid for 2010
16,000
32,000
Common Stockholders
0
Total dividend
512,000
Paid preferred for ‘11 & ’12 -32,000
Common Stockholders
$480,000
$480,000
= $1.20 per share
21-10
400,000 shares
Return on Investment
Suppose you bought 200 shares of General Electric stock at $18.34 and sold
them 1 year later at $22.10 With a 1% commission rate buying and selling
the stock and a current $124 dividend per share in effect what was your
return on investment?
Bought
200 shares at $18.34 = $3,668.00
Commission at 1% =
36.68
Total cost
$3,704.68
Total receipt $4,375.80
Total cost
-3,704.68
Net Gain
$671.12
Dividends
+ 248.00
Total Gain
$919.12
21-11
Sold
200 shares at $22.10 = $4,420
Commission at 1%
= - 44.20
Total cost
$4372.80
$919.12
$3,704.68
(200 x $.1.24)
24.81% Return on
Investment
Bond Quotations in Newspaper’s
Current
Bonds
Yield
Coke 5.6514
5.7
Vol.
6
Net
Close
99.59
change
-1
*Bonds are stated as a percent of face amount
Yearly Interest = Face value of bond x stated yearly interest rate
$56.50 =
$1,000
x
.0565
21-12
Bond Quotations in Newspaper’s
Current
Bonds
Yield
Coke 5.6514
5.7
Vol.
6
Net
Close
99.59
change
-1
Yearly interest: = $56.50 = (.0565 x $1,000) = 5.69% = 5.7%
Cost of bond:
$995.90 (.9959 x $1,000)
21-13
Calculating Bond Yields
Bond yield = Total annual interest of bond
Total current cost of bond at closing
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
21-14
$282.50 = 5.7%
$ 4979.50
Why Investors Choose Mutual Funds
Diversification
Professional management
Liquidity
Low fund expenses
Access to foreign markets
21-15
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
21-16
Commissions: Mutual Funds
Classification
No-load (NL) fund
Commission charge
Offer price to buy
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
(Buy from a broker)
21-17
8 1 % or less
2
NAV + commission %
Mutual Fund Quotations in Newspaper’s
FUND
Name of
Fund
21-18
YTD
NAME NAV
CHG
% RET
Grln P
0.24
4.1
NAV plus the sales
commission
9.72
Fund return
this year
Changes in NAV
versus the previous day