Stocks, Bonds, and Mutual Funds Chapter 21 Stocks, Bonds, and Mutual Funds McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.

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 common stocks; calculate return on investment

Stocks, Bonds, and Mutual Funds #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

Stocks, Bonds, and Mutual Funds #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

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

Dividends - Payments to shareholders from profit Stocks Dividends - Payments to shareholders from profit Dividends in arrears - Payments owed to cumulative preferred shareholders

Stock exchanges - An orderly trading place for stock. 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.

Stock Quotations in Newspaper’s YTD 52 weeks YLD VOL NET % CHG HI LO STOCK (SYM) DIV % PE 100s LAST CHG +14.7 28.41 14.84 Disney DIS .21 .8 32 83871 26.76 -0.11

Stock Quotation Calculations Stock yield = Annual dividend per share = $.21 = .8% Today’s closing price per share $26.76 Earnings per share = Annual earnings . Total number of shares outstanding PE Ratio = Closing price per share of stock = $26.76 = 32 Annual earnings per share $.84

Dividends on Preferred and Common Stock Stock records for Sony Corporation show the following: Preferred stock issued: 25,000 shares. In 2006, Sony paid no dividends Preferred stock cumulative at $.50 per share. In 2007, Sony paid $300,000 in dividends. Common stock issued: 250,000 shares 2006 Dividends paid 0 Preferred stockholders Paid: 0 Owe: 25,000 x $.50 = $12,500 Common Stockholders 0 2007 Dividends paid $300,000 Paid for 2006 12,500 Paid for 2007 12,500 Common Stockholders $275,000 $275,000 = $1.10 per share 250,000 shares

Return on Investment Suppose you bought 200 shares at $21.25 and sold them 1 year later at $27.50. With a 1% commission rate buying and selling the stock and a current $.21 dividend per share in effect what was your return on investment? Bought 200 shares at $21.25 = $4,250.00 Commission at 1% = 42.50 Total cost $4, 292.50 Sold 200 shares at $27.50 = $5,500 Commission at 1% = - 55 Total cost $5,445 Total receipt $5,445.00 Total cost -4,292.50 Net Gain $1,152. 50 Dividends + 42.00 (200 x $.21) Total Gain $1,194.50 $1,194.50 $4,292.50 27.83% Return on Investment

Bond Quotations in Newspaper’s Current Net Bonds Yield Vol. Close change IBM 8 3 19 7.0 5 120 1 +1 8 2 Yearly Interest = Face value of bond x stated yearly interest rate $83.75 = $1,000 x .08375

Bond Quotations in Newspaper’s Current Net Bonds Yield Vol. 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)

Calculating Bond Yields Bond yield = Total annual interest of bond Total current cost of bond at closing Sue Lawson bought 5 bonds of IBM at the closing price of 1201/2. What is Sue’s interest? 5 bonds x $83.75 interest per bond per year $418.75 = 6.95% = 7% $ 6,025 5 x $1,205

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

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

Commissions: Mutual Funds Classification Commission 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

Mutual Fund Quotations in Newspaper’s FUND YTD NAME NAV CHG % RET Grln P 18.43 -0.09 4.1