Chapter 20 Investments Copyright © 2000 by Harcourt, Inc.

Chapter 20, Investments Section I Stocks 20-1 Understanding stocks and distributing dividends on preferred and common stock Reading Stock quotations Calculating current yield for a stock Determining the price-earnings ratio of a stock Computing the cost, proceeds, and gain (loss) on a stock transaction. Section II Bonds 20-6 Understanding bonds and reading bond quotation Commuting the cost of purchasing bonds and the proceeds from the sale of bonds Calculating the current yield for bonds.

Chapter 20, Investments (Cont.) Section III Mutual Funds 20-9 Understanding mutual funds and reading mutual fund quotations Calculating the sales change and sales charge percent of a mutual fund Calculating net asset value of a mutual fund Calculating the number of shares purchased of a mutual fund Calculating return on investment.

Everybody’s Business History has demonstrated repeatedly that a well- diversified portfolio of investments based on careful planning and a focused strategy reduces risk and provides an opportunity for solid returns. Changing investments too frequently- overreacting to daily economic data or the latest Wall Street fads – can distract investors from reaching their specific goals.

Everybody’s Business The New York Stock Exchange began trading stocks in dollars and cents rather than fractions in For investors, the move to decimals meant that the spreads – the difference between the price of a stock and what a broker will charge investors to buy it – were narrowed. The minimum spread using fractions was one- eight, or 12.5 cents. With decimal pricing, the spread could be as little as a penny.

20-3 Calculating Current Yield for a Stock n Steps to determine the Current Yield of a Stock: – Step 1. Divide the annual dividend per share by the current stock: – Step 2. Convert the answer to a percent, rounded to the nearest tenth. Current yield = Annual dividend per share Current price of the stock

20-4 Calculating the Price-Earnings Ration of a Stock a Stock n Steps to Determine the Price-Earnings Ratio of a Stock: – Step 1. Divide the current price of the stock by the earnings per share for the past 12 months: – Step 2. round answer to the nearest whole number. Price-earnings ratio = Current price of the stock Earnings per share

Everybody’s Business A bull market is when investors buy in anticipation that stock prices will go up. A bear market is when investors sell in anticipation that stock prices will go down. Many factors go into the performance of stocks. Profits and expectations of success are one area: another is the overall economic climate. Investors are generally positive, or bullish, during periods of abundant money, low interest rates, tax cuts, political stability, and high employment. Investors are generally negative, or bearish during periods of tight money, high interest rates, increasing taxes, political unrest, and high unemployment.

Everybody’s Business Remember when purchasing stock, commissions are added to the cost of the stock to get total cost; when selling, the commissions are deducted by the brokerage firm form the sale price to get proceeds of the sale.

Section III, Bonds 20-7 Computing the Cost of purchasing Bonds and the Proceeds from the Dale of Bonds Steps to Calculate the Cost of Purchasing a Bond: – Step 1. Calculate the accrued interest on the bond since the last payment date using I = PRT.: – Step 2. Calculate the price to purchase the bond: – Step 3. Calculate total purchase price: Price per bond = Current market price + Accrued interest + Commission Total purchase price = Price per bond x Number of bonds purchased

20-8 Calculating the Current Yield for a Bond Steps to Calculate Current Yield for a Bond: – Step 1. Calculate the annual interest and current price of the bond. – Step 2. Divide the annual interest of the bond by the current market price: – Step 3. Convert the answer to a percent, rounded to the nearest tenth. Current yield = Annual interest Current market price

20-11 Calculating the Net Asset Value of a Mutual Fund Steps to Calculate Net Asset Value of a Mutual Fund : – Step 1. Calculate net value by subtracting the total liabilities form the total assets of the fund and dividing by the number of shares outstanding. and current price of the bond. – Step 2. round the answer to dollars and cents. Net asset value (NAV) = Total assets – Total liabilities Number of shares outstanding

Everybody’s Business The nineties were one of the best decades of the century for return on investment on stocks; according to Kiplinger’s Personal Finance Magazine, nobody did better than Dell Computer’s stockholders. If you purchased Dell shares in 1990, and held onto them through 1999, you would have reaped an annualized return of 107% - doubling your investment and the some every year. Over the decade this amounts to an astounding total return of 57,282%!

Chapter 20, Investments Financial riskConservative investment Speculative investmentsDiversified portfolio Stocks, or equitiesShare Stock certificatePublicly held corporation ShareholderDividends Preferred stockPer value No par valueCumulative preferred stock Dividends in arrearsCurrent yield Price-earnings ratioProceeds StockbrokerStockbroker’s commission Full-service brokerdiscount broker BondSecured bond

Chapter 20, Investments (Cont.) Unsecured bondsConvertible bonds Callable bondsCoupon rate PremiumDiscount Accrued interestMutual fund Net asset value (NAV)Offer price LoadFront-end load Back-end load Return on investment (ROI)

Chapter 20 Stocks Dividend per share (preferred) = Par value x Dividend rate Total common dividend Number of shares (common) Annual dividend per share Current price of stock Current price per share Earnings per share Gain (or loss) on stock = Proceeds - Total cost Copyright © 2000 by Harcourt, Inc. Dividend per share (common) = Current yield = Price-earnings ratio =

Chapter 20 “Formulas” Bonds Price per bond = Current Accrued market price interest Proceeds = Current + Accrued interest + Commission market price Annual interest Current market price Copyright © 2000 by Harcourt, Inc. Current yield = + + Commission

Chapter 20 “Formulas” Mutual funds Mutual fund sales charge = Offer price - Net asset value Sales charge percent = Sales charge / Net asset value Total assets - total liabilities Number of shares outstanding Total investment Offer price Total gain Total cost of purchase Copyright © 2000 by Harcourt, Inc. Net asset value (NAV) = Number of shares purchased = Return on investment(ROI) =