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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 HI LO STOCK (SYM) DIV % PE 100s 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 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. In 2012, Jason paid $512,000 in Common stock issued: 400,000 shares dividends. 2011 2012 Dividends paid 0 Dividends paid Preferred stockholders Paid: 0 Paid for 2011 $512,000 16,000 Owe: 20,000 x $.80 = $16,000 Paid for 2010 Common Stockholders 0 Total dividend 16,000 32,000 512,000 Paid preferred for ‘11 & ’12 Common Stockholders 21-10 $480,000 400,000 shares -32,000 $480,000 = $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 4.1 NAV plus the sales commission Fund return this year Changes in NAV versus the previous day