McGraw-Hill/Irwin ©2011 The McGraw-Hill Companies, All Rights Reserved Chapter 21 Stocks, Bonds, and Mutual Funds

Read and explain stock quotations 2. Calculate dividends of preferred and common stocks; calculate return on investment Stocks, Bonds, and Mutual Funds #21 Learning Unit Objectives Stocks LU21.1

Read and explain bond quotations 2. Compare bond yields to bond premiums and discounts Stocks, Bonds, and Mutual Funds #21 Learning Unit Objectives Bonds LU21.2

Explain and calculate net asset and mutual fund commissions 2. Read and explain mutual fund quotations Stocks, Bonds, and Mutual Funds #21 Learning Unit Objectives Mutual Funds LU21.3

21-5 Cumulative preferred stock - entitles its owners to a specific amount of dividends in 1 year Stock - Shares of ownership in a company Common Stock - Stock that allows owners to have voting rights Stocks Preferred Stock - Does not allow voting rights, but gives preference over common stockholders in dividends

21-6 Stocks Dividends - Payments to shareholders from profit Dividends in arrears - Payments owed to cumulative preferred shareholders Stockholders Elect Board of Directors Elect Officers of Corporation

21-7 How Stocks Are Traded Stockbrokers - people who buy and sell stock on the floor of the exchanges. They charge a commission for trading stocks. Stock exchanges - An orderly trading place for stock.

21-8 Stock Quotations in Newspaper’s 52 weeks YLD VOL NET HI LO STOCK (SYM) DIV % PE 100s CLOSE CHG General Electric (GE) ,

21-9 PE Ratio = Closing price per share of stock = $18.34 = 8.73 Annual earnings per share $2.10 Earnings per share = Annual earnings. Total number of shares outstanding Stock Quotation Calculations Stock yield = Annual dividend per share = $1.24 = 6.8% Today’s closing price per share $18.34 *Earnings Per Share are not listed on the stock quote

21-10 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 Dividends paid0 Preferred stockholders Paid: 0 Owe: 20,000 x $.80 = $16,000 Common Stockholders Dividends paid $512,000 Paid for ,000 Paid for ,000 32,000 Total dividend 512,000 Paid preferred for ‘11 & ’12 -32,000 Common Stockholders $480,000 $480,000 = $1.20 per share 400,000 shares

21-11 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, Commission at 1% = Total cost $3, Sold 200 shares at $22.10 = $4,420 Commission at 1% = Total cost $ Total receipt$4, Total cost -3, Net Gain $ Dividends (200 x $.1.24) Total Gain $ $ $3, % Return on Investment

21-12 Bond Quotations in Newspaper’s CurrentNet BondsYieldVol.Close change Coke Yearly Interest = Face value of bond x stated yearly interest rate $56.50 = $1,000 x.0565 *Bonds are stated as a percent of face amount

21-13 Bond Quotations in Newspaper’s CurrentNet BondsYieldVol.Close change Coke Yearly interest: = $56.50 = (.0565 x $1,000) = 5.69% = 5.7% Cost of bond: $ (.9959 x $1,000)

21-14 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 What is Jim’s interest? (Remember that in dollars is $995.90) $ = 5.7% $ x $ bonds x $56.50 interest per bond per year

21-15 Why Investors Choose Mutual Funds Diversification Liquidity Low fund expenses Access to foreign markets Professional management

21-16 Net Asset Value NAV = Current market value of fund’s investment - Current liabilities Number of shares outstanding Net Asset Value (NAV) - the dollar value of one mutual fund share Mutual Fund - A portfolio of stocks and/or bonds

21-17 Commissions: Mutual Funds ClassificationCommission charge Offer price to buy No-load (NL) fund 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 8 1 % or less NAV + commission % (Buy from a broker) 2

21-18 Mutual Fund Quotations in Newspaper’s FUND YTD NAME NAV CHG % RET Grln P Name of Fund NAV plus the sales commission Changes in NAV versus the previous day Fund return this year