Chapter 21 Stocks, Bonds, and Mutual Funds Mc. Graw-Hill/Irwin © 2011 The Mc. Graw-Hill Companies, All Rights Reserved
#21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives LU 21. 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 LU 21. 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 LU 21. 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 HI LO STOCK (SYM) DIV % PE 100 s CLOSE 40. 49 17. 27 General Electric (GE) 1. 24 6. 8 8. 73 75, 537 18. 34 21 -8 NET CHG 1. 59
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 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 Dividends paid 2012 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 21 -10 $480, 000 400, 000 shares = $1. 20 per share
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 Name of Fund 21 -18 FUND YTD NAME NAV CHG % RET Grln P 9. 72 0. 24 Fund return this year 4. 1 NAV plus the sales commission Changes in NAV versus the previous day
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