Chapter 21 - Stocks, bonds, and mutual funds. In this chapter, the learning objectives are: Read, calculate, and explain stock quotations; calculate dividends of preferred and common stocks; calculate return on investment; read, calculate, and explain bond quotations; compare bond yields to bond premiums and discounts; explain and calculate net asset and mutual fund commissions; read and explain mutual fund quotations.
Chapter 21 Stocks, Bonds, and Mutual Funds McGrawHill/Irwin ©2011 The McGrawHill Companies, All Rights Reserved #21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives LU21.1 Stocks Read and explain stock quotations Calculate dividends of preferred and common stocks; calculate return on investment 212 #21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives LU21.2 Bonds Read and explain bond quotations Compare bond yields to bond premiums and discounts 213 #21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives LU21.3 Mutual Funds Explain and calculate net asset and mutual fund commissions Read and explain mutual fund quotations 214 Stocks Stock Shares of ownership in a company Preferred Stock Does not allow voting rights, but gives preference over common stockholders in dividends 215 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 216 Dividends in arrears Payments owed to cumulative preferred shareholders How Stocks Are Traded Stock exchanges An orderly trading place for stock 217 Stockbrokers people who buy and sell stock on the floor of the exchanges. They charge a commission for trading stocks 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 1.59 218 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 $2.10 219 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. In 2012, Jason paid $512,000 in Common stock issued: 400,000 shares dividends 2011 2012 Dividends paid Dividends paid $512,000 Preferred stockholders Paid: Paid for 2011 16,000 Owe: 20,000 x $.80 = $16,000 Paid for 2010 Common Stockholders Total dividend 16,000 32,000 512,000 Paid preferred for ‘11 & ’12 32,000 Common Stockholders 2110 $480,000 $480,000 = $1.20 per share 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 Total cost Net Gain Dividends Total Gain 2111 Sold 200 shares at $22.10 = $4,420 Commission at 1% = 44.20 Total cost $4372.80 $4,375.80 3,704.68 $671.12 + 248.00 (200 x $.1.24) $919.12 $919.12 $3,704.68 24.81% Return on Investment Bond Quotations in Newspaper’s Bonds Current Yield Coke 5.6514 5.7 Vol Net Close 6 99.59 1 change *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 2112 Bond Quotations in Newspaper’s Bonds Current Yield Vol Net Close change Coke 5.6514 5.7 6 99.59 1 Yearly interest: = $56.50 = (.0565 x $1,000) = 5.69% = 5.7% Cost of bond: $995.90 (.9959 x $1,000) 2113 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 2114 $282.50 = 5.7% $ 4979.50 Why Investors Choose Mutual Funds Diversification Professional management Liquidity Low fund expenses Access to foreign markets 2115 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 2116 Commissions: Mutual Funds Classification Commission charge Offer price to buy Noload (NL) fund No sales charge (Buy directly from investment company) Lowload (LL) fund 3% or less NAV + commission % Load fund NAV + commission % (Buy directly from investment company or from a broker) (Buy from a broker) 2117 NAV 8 1 % or less 2 Mutual Fund Quotations in Newspaper’s Name of Fund 2118 FUND YTD NAME NAV CHG % RET Grln P 9.72 0.24 4.1 NAV plus the sales commission Fund return this year Changes in NAV versus the previous day ... investment 21 2 #21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives LU21.2 Bonds Read and explain bond quotations Compare bond yields to bond premiums and discounts 21 3 #21 Stocks, Bonds, and Mutual Funds... #21 Stocks, Bonds, and Mutual Funds Learning Unit Objectives LU21.1 Stocks Read and explain stock quotations Calculate dividends of preferred and ... Stocks, Bonds, and Mutual Funds Learning Unit Objectives LU21.3 Mutual Funds Explain and calculate net asset and mutual fund commissions Read and explain mutual fund quotations 21 4 Stocks Stock Shares of ownership in a company