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2. 1-2 Chapter 21 Stocks, Bonds, and Mutual Funds McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

3. 1-3 Read and explain stock quotations Calculate dividends of preferred and common stocks; calculate return on investment Stocks, Bonds, and Mutual Funds #21 Learning Unit Objectives Stocks LU21.1

4. 1-4 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 Dividends - Payments to shareholders from profit Dividends in arrears - Payments owed to cumulative preferred shareholders

5. 1-5 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

6. 1-6 Stock Quotations in Newspaper’s YTD 52 weeks YLD VOL NET % CHG HI LO STOCK (SYM) DIV % PE 100s LAST CHG +.67 60.50 46.25 Walmart WMT.36.68 27.11 70606 53.47.45 Click to see WEB listing

7. 1-7 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 52 weeks YLD VOL NET % CHG HI LO STOCK (SYM) DIV % PE 100s LAST CHG +.67 60.50 46.25 Walmart WMT.36.68 27.11 70606 53.47.45

8. 1-8 Stock Quotation Calculations Use the current Walmart prices to calculate Stock Yield YTD 52 weeks YLD VOL NET % CHG HI LO STOCK (SYM) DIV % PE 100s LAST CHG +.67 60.50 46.25 Walmart WMT.36.68 27.11 70606 53.47.45 Stock yield = Annual dividend per share = $.36 =.67% Today’s closing price per share $53.47

9. 1-9 Earnings per share = Annual earnings. Total number of shares outstanding Stock Quotation Calculations YTD 52 weeks YLD VOL NET % CHG HI LO STOCK (SYM) DIV % PE 100s LAST CHG +.67 60.50 46.25 Walmart WMT.36.68 27.11 70606 53.47.45 Earnings: $8,039 million Shares: 3,999.5 million

10. 1-10 Earnings per share = Annual earnings. Total number of shares outstanding Stock Quotation Calculations YTD 52 weeks YLD VOL NET % CHG HI LO STOCK (SYM) DIV % PE 100s LAST CHG +.67 60.50 46.25 Walmart WMT.36.68 27.11 70606 53.47.45 $8,039 million / 3,999.5 million =$ 2.01

11. 1-11 Price-Earnings ratio PE Ratio = Closing price per share of stock Annual earnings per share Stock Quotation Calculations YTD 52 weeks YLD VOL NET % CHG HI LO STOCK (SYM) DIV % PE 100s LAST CHG +.67 60.50 46.25 Walmart WMT.36.68 27.11 70606 53.47.45

12. 1-12 PE Ratio = Closing price per share of stock Annual earnings per share 53.47 / 2.01 = 26.6 Stock Quotation Calculations YTD 52 weeks YLD VOL NET % CHG HI LO STOCK (SYM) DIV % PE 100s LAST CHG +.67 60.50 46.25 Walmart WMT.36.68 27.11 70606 53.47.45

13. 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

14. 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 paid0 Preferred stockholders Paid: 0 Owe: 25,000 x $.50 = $12,500 Common Stockholders0

15. 1-15 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 paid0 Preferred stockholders Paid: 0 Owe: 25,000 x $.50 = $12,500 Common Stockholders0 2004 Dividends paid $300,000

16. 1-16 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 paid0 Preferred stockholders Paid: 0 Owe: 25,000 x $.50 = $12,500 Common Stockholders0 2004 Dividends paid $300,000 Paid for 2003 12,500

17. 1-17 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 paid0 Preferred stockholders Paid: 0 Owe: 25,000 x $.50 = $12,500 Common Stockholders0 2004 Dividends paid $300,000 Paid for 2003 12,500 Paid for 2004 12,500

18. 1-18 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 paid0 Preferred stockholders Paid: 0 Owe: 25,000 x $.50 = $12,500 Common Stockholders0 2004 Dividends paid $300,000 Paid for 2003 12,500 Paid for 2004 12,500 Common Stockholders $275,000

19. 1-19 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 paid0 Preferred stockholders Paid: 0 Owe: 25,000 x $.50 = $12,500 Common Stockholders0 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

20. 1-20 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 Sold 100 shares at $68 = $6,800 Commission at 1% = - 68 Total cost $6,732 Return on Investment (ROI) ROI = Net GAIN or LOSS Total Purchase Cost

21. 1-21 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 Sold 100 shares at $68 = $6,800 Commission at 1% = - 68 Total cost $6,732 Total receipt$6,732.00 Total cost -5,277.25 Net Gain$1,454.75 Dividends+ 10.00 (100 x $.10) Total Gain$1,464.75 Return on Investment $1,464.75 $5,277.25 27.76%

22. 1-22 Read and explain bond quotations Compare bond yields to bond premiums and discounts Stocks, Bonds, and Mutual Funds #21 Learning Unit Objectives Bonds LU21.2

23. 1-23 Bonds as Investments Bonds represent “debt” securities A company who issues (sells) the bond is borrowing 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

24. 1-24 Bond Quotations in Newspaper’s CurrentNet BondsYieldVol.Close change IBM 8 3 19 7.0 5 120 1 +1 8 2 Yearly interest: = $83.75 = (.08375 x $1,000) =.0695 Cost of bond: $1,205 (1.205 x $1,000)

25. 1-25 Bond Quotations in Newspaper’s CurrentNet BondsYieldVol.Close change IBM 8 3 19 7.0 5 120 1 +1 8 2 How much would it cost to purchase 5 bonds?

26. 1-26 Bond Quotations in Newspaper’s CurrentNet BondsYieldVol.Close change IBM 8 3 19 7.0 5 120 1 +1 8 2 How much would it cost to purchase 5 bonds? 5 X 1000 X 120.5% = 6,025

27. 1-27 Bond Quotations in Newspaper’s CurrentNet BondsYieldVol.Close change IBM 8 3 19 7.0 5 120 1 +1 8 2 How much interest would I receive in one year?

28. 1-28 Bond Quotations in Newspaper’s CurrentNet BondsYieldVol.Close change IBM 8 3 19 7.0 5 120 1 +1 8 2 How much interest would I receive in one year? 5 x 1000 x 8.375% = 418.75

29. 1-29 Calculating Bond Yields Bond yield = Total annual interest of bond Total current cost of bond at closing Sue Lawson bought 10 bonds of APS at the closing price of 1101/4. What is Sue’s interest? $662.5 =.06 = 6% $11025 10 x $1102.50 10 bonds x $66.25 interest per bond per year = 662.50 CurrentNet BondsYieldVol.Close change APX 6 5 19 ? 10 110 1 +2 8 4

30. 1-30 Explain and calculate net asset and mutual fund commissions Read and explain mutual fund quotations Stocks, Bonds, and Mutual Funds #21 Learning Unit Objectives Mutual Funds LU21.3

31. 1-31 Why Investors Choose Mutual Funds Diversification Liquidity Low fund expenses Access to foreign markets Professional management

32. 1-32 Net Asset Value Mutual Fund - A portfolio of stocks and/or bonds

33. 1-33 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

34. 1-34 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

35. 1-35 Mutual Fund Quotations in Newspaper’s FUND YTD NAME NAV CHG % RET Grln P 19.67 -0.12 1.4

36. 1-36 Mutual Fund Quotations in Newspaper’s FUND YTD NAME NAV CHG % RET Grln P 19.67 -0.12 1.4 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 20.26 X 50 = $1013 total cost

37. 1-37 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 35,000,000 – 900,000 = 13.64 2,500,000 NAV = Current market value of fund’s investment - Current liabilities Number of shares outstanding