1-1
Chapter 21
Stocks, Bonds, and
Mutual Funds
1-2
McGraw-Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
#21
Stocks, Bonds, and Mutual Funds
Learning Unit Objectives
LU21.1 Stocks
1-3
•
Read and explain stock quotations
•
Calculate dividends of preferred and common
stocks; calculate return on investment
Stocks
Stock - Shares of
ownership in a company
Dividends Payments to
shareholders from
profit
Common Stock - Stock
that allows owners to have
voting rights
1-4
Preferred Stock - Does not
allow voting rights, but gives
preference over common
stockholders in dividends
Dividends in arrears Payments owed to
cumulative preferred
shareholders
Cumulative preferred stock entitles its owners to a specific
amount of dividends in 1 year
How Stocks Are Traded
Stockbrokers - people who buy and sell stock.
They charge a commission for trading stocks.
Internet trading - - individuals may buy and
sell shares of stock for a fee
Stock Prices – listed in the financial sections of
newspapers
also listed “on-line” in various WEB sites
1-5
Stock Quotations in Newspaper’s
Click to see WEB listing
YTD
% CHG
52 weeks
HI LO
+.67
60.50 46.25 Walmart WMT
1-6
STOCK (SYM)
YLD
VOL
DIV % PE 100s
.36
LAST
.68 27.11 70606 53.47
NET
CHG
.45
Stock Quotation Calculations
Stock yield = Annual dividend per share
Today’s closing price per share
Use the current Walmart prices to calculate
Stock Yield
YTD
% CHG
52 weeks
HI LO
+.67
60.50 46.25 Walmart WMT
1-7
STOCK (SYM)
YLD
VOL
DIV % PE 100s
.36
LAST
.68 27.11 70606 53.47
NET
CHG
.45
Stock Quotation Calculations
Stock yield = Annual dividend per share =
$.36 = .67%
Today’s closing price per share $53.47
Use the current Walmart prices to calculate
Stock Yield
YTD
% CHG
52 weeks
HI LO
+.67
60.50 46.25 Walmart WMT
1-8
STOCK (SYM)
YLD
VOL
DIV % PE 100s
.36
LAST
.68 27.11 70606 53.47
NET
CHG
.45
Stock Quotation Calculations
Earnings per share =
Annual earnings
.
Total number of shares outstanding
Earnings: $8,039 million
Shares: 3,999.5 million
YTD
% CHG
52 weeks
HI LO
+.67
60.50 46.25 Walmart WMT
1-9
STOCK (SYM)
YLD
VOL
DIV % PE 100s
.36
LAST
.68 27.11 70606 53.47
NET
CHG
.45
Stock Quotation Calculations
Earnings per share =
Annual earnings
.
Total number of shares outstanding
$8,039 million / 3,999.5 million =$ 2.01
YTD
% CHG
52 weeks
HI LO
+.67
60.50 46.25 Walmart WMT
1-10
STOCK (SYM)
YLD
VOL
DIV % PE 100s
.36
LAST
.68 27.11 70606 53.47
NET
CHG
.45
Stock Quotation Calculations
Price-Earnings ratio
PE Ratio = Closing price per share of stock
Annual earnings per share
YTD
% CHG
52 weeks
HI LO
+.67
60.50 46.25 Walmart WMT
1-11
STOCK (SYM)
YLD
VOL
DIV % PE 100s
.36
LAST
.68 27.11 70606 53.47
NET
CHG
.45
Stock Quotation Calculations
PE Ratio = Closing price per share of stock
Annual earnings per share
53.47 / 2.01 = 26.6
YTD
% CHG
52 weeks
HI LO
+.67
60.50 46.25 Walmart WMT
1-12
STOCK (SYM)
YLD
VOL
DIV % PE 100s
.36
LAST
.68 27.11 70606 53.47
NET
CHG
.45
Dividends on Preferred and Common Stock
Stock records for Sony Corporation show the following:
Preferred stock issued: 25,000 shares.
In 2003, Sony paid no dividends
Preferred stock cumulative at $.50 per share.
In 2004, Sony paid $300,000 in
dividends.
Common stock issued: 250,000 shares
1-13
Dividends on Preferred and Common Stock
Stock records for Sony Corporation show the following:
Preferred stock issued: 25,000 shares.
In 2003, Sony paid no dividends
Preferred stock cumulative at $.50 per share.
In 2004, Sony paid $300,000 in
dividends.
Common stock issued: 250,000 shares
2003
Dividends paid
0
Preferred stockholders Paid:
0
Owe: 25,000 x $.50 = $12,500
Common Stockholders
0
1-14
Dividends on Preferred and Common Stock
Stock records for Sony Corporation show the following:
Preferred stock issued: 25,000 shares.
In 2003, Sony paid no dividends
Preferred stock cumulative at $.50 per share.
In 2004, Sony paid $300,000 in
dividends.
Common stock issued: 250,000 shares
2003
Dividends paid
Dividends paid
0
Preferred stockholders Paid:
0
Owe: 25,000 x $.50 = $12,500
Common Stockholders
0
1-15
2004
$300,000
Dividends on Preferred and Common Stock
Stock records for Sony Corporation show the following:
Preferred stock issued: 25,000 shares.
In 2003, Sony paid no dividends
Preferred stock cumulative at $.50 per share.
In 2004, Sony paid $300,000 in
dividends.
Common stock issued: 250,000 shares
2003
Dividends paid
Dividends paid
0
Paid for 2003
Preferred stockholders Paid:
0
Owe: 25,000 x $.50 = $12,500
Common Stockholders
0
1-16
2004
$300,000
12,500
Dividends on Preferred and Common Stock
Stock records for Sony Corporation show the following:
Preferred stock issued: 25,000 shares.
In 2003, Sony paid no dividends
Preferred stock cumulative at $.50 per share.
In 2004, Sony paid $300,000 in
dividends.
Common stock issued: 250,000 shares
2003
Dividends paid
Dividends paid
0
Paid for 2003
Preferred stockholders Paid:
0
Owe: 25,000 x $.50 = $12,500 Paid for 2004
Common Stockholders
0
1-17
2004
$300,000
12,500
12,500
Dividends on Preferred and Common Stock
Stock records for Sony Corporation show the following:
Preferred stock issued: 25,000 shares.
In 2003, Sony paid no dividends
Preferred stock cumulative at $.50 per share.
In 2004, Sony paid $300,000 in
dividends.
Common stock issued: 250,000 shares
2003
Dividends paid
0
Preferred stockholders Paid:
0
Owe: 25,000 x $.50 = $12,500
Common Stockholders
0
1-18
2004
Dividends paid
Paid for 2003
Paid for 2004
Common Stockholders
$300,000
12,500
12,500
$275,000
Dividends on Preferred and Common Stock
Stock records for Sony Corporation show the following:
Preferred stock issued: 25,000 shares.
In 2003, Sony paid no dividends
Preferred stock cumulative at $.50 per share.
In 2004, Sony paid $300,000 in
dividends.
Common stock issued: 250,000 shares
2003
Dividends paid
0
Preferred stockholders Paid:
0
Owe: 25,000 x $.50 = $12,500
Common Stockholders
0
1-19
2004
Dividends paid
$300,000
Paid for 2003
12,500
Paid for 2004
12,500
Common Stockholders
$275,000
$275,000
= $1.10 per share
250,000 shares
Return on Investment
Suppose you bought 100 shares at $52.25 and sold them 1 year
later at $68. With a 1% commission rate buying and selling the
stock and a current $.10 dividend per share in effect what was
your return on investment?
Bought
100 shares at $52.25 = $5,225.00
Commission at 1% =
52.25
Total cost
$5, 277.25
Return on Investment (ROI)
ROI = Net GAIN or LOSS
Total Purchase Cost
1-20
Sold
100 shares at $68
Commission at 1%
Total cost
= $6,800
= - 68
$6,732
Return on Investment
Suppose you bought 100 shares at $52.25 and sold them 1 year
later at $68. With a 1% commission rate buying and selling the
stock and a current $.10 dividend per share in effect what was
your return on investment?
Bought
100 shares at $52.25 = $5,225.00
Commission at 1% =
52.25
Total cost
$5, 277.25
Total receipt
Total cost
Net Gain
Dividends
Total Gain
1-21
$6,732.00
-5,277.25
$1,454.75
+ 10.00
$1,464.75
Sold
100 shares at $68
Commission at 1%
Total cost
= $6,800
= - 68
$6,732
Return on Investment
(100 x $.10)
$1,464.75
$5,277.25
27.76%
#21
Stocks, Bonds, and Mutual Funds
Learning Unit Objectives
LU21.2 Bonds
1-22
•
Read and explain bond quotations
•
Compare bond yields to bond premiums and
discounts
Bonds as Investments
• Bonds represent “debt” securities
• A company who issues (sells) the bond is borrowing
•
•
•
•
•
1-23
money from the investor (buyer of bond)
Bonds pay interest (usually semiannually)
Bonds are “paid off” at some future date
Bonds are usually issued in $1,000 face amounts
Selling price may be higher (Premium) or lower
(Discount) than the face amount
Bond Yield represents the current percentage return to
the investor
Bond Quotations in Newspaper’s
Bonds
IBM 8 3 19
8
Current
Yield
7.0
Vol.
5
Net
Close
120 1
2
change
+1
Yearly interest: = $83.75 = (.08375 x $1,000) = .0695
Cost of bond:
$1,205
(1.205 x $1,000)
1-24
Bond Quotations in Newspaper’s
Bonds
IBM 8 3 19
8
Current
Yield
7.0
Vol.
5
Net
Close
120 1
2
How much would it cost to purchase 5 bonds?
1-25
change
+1
Bond Quotations in Newspaper’s
Bonds
IBM 8 3 19
8
Current
Yield
7.0
Vol.
5
Net
Close
120 1
2
How much would it cost to purchase 5 bonds?
5 X 1000 X 120.5% = 6,025
1-26
change
+1
Bond Quotations in Newspaper’s
Bonds
IBM 8 3 19
8
Current
Yield
7.0
Vol.
5
Net
Close
120 1
2
How much interest would I receive in one year?
1-27
change
+1
Bond Quotations in Newspaper’s
Bonds
IBM 8 3 19
8
Current
Yield
7.0
Vol.
5
Net
Close
120 1
2
How much interest would I receive in one year?
5 x 1000 x 8.375% = 418.75
1-28
change
+1
Calculating Bond Yields
Sue Lawson bought 10 bonds of APS at the closing price
of 1101/4. What is Sue’s interest?
Current
Net
Bonds
Yield
Vol.
Close
change
APX 6 5 19
?
10
110 1
+2
8
4
10 bonds x $66.25
interest per bond
per year = 662.50
10 x $1102.50
1-29
Bond yield = Total annual interest of bond
Total current cost of bond at closing
$662.5 = .06 = 6%
$11025
#21
Stocks, Bonds, and Mutual Funds
Learning Unit Objectives
LU21.3 Mutual Funds
1-30
•
Explain and calculate net asset and mutual fund
commissions
•
Read and explain mutual fund quotations
Why Investors Choose Mutual Funds
Diversification
Professional management
Liquidity
Low fund expenses
Access to foreign markets
1-31
Net Asset Value
Mutual Fund - A portfolio of stocks and/or bonds
1-32
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)
1-33
8 1 % or less
2
NAV + commission %
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
1-34
Mutual Fund Quotations in Newspaper’s
FUND
1-35
YTD
NAME NAV
CHG
% RET
Grln P
-0.12
1.4
19.67
Mutual Fund Quotations in Newspaper’s
FUND
YTD
NAME NAV
CHG
% RET
Grln P
-0.12
1.4
19.67
Tom wants to purchase 50 shares of the
fund. This is a low-load fund subject to a
3% commission. What will Tom pay?
19.67 X .03 = .59 commission
19.67 + .59 = 20.26 per share
1-36
20.26 X 50 = $1013 total cost
FIND the NAV
• Current market value of XP fund investments is
$35,500,000
• Current liabilities $900,000
• Number of fund shares outstanding is 2,500,000
NAV = Current market value of fund’s investment - Current liabilities
Number of shares outstanding
• 35,000,000 – 900,000 = 13.64
•
1-37
2,500,000