1. 11 - 1 COPYRIGHT © 2008 by Nelson, a division of Thomson Canada Ltd Chapter 11 – Investing in Stocks, Bonds and Mutual Funds

2. 11 - 2 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Chapter 11 - Learning Goals LG 1-Describe the various types of risks and the sources of return to which investors are exposed in their search for an acceptable investment. LG 2-Discuss the merits of investing in common stock, the different types of common stock investments, the various measures of performance, and the valuation of stocks. LG 3-Discuss the merits of investing in bonds, the different types of bonds, the various measures of yield, and bond price behaviour. LG 4-Describe the basic features of mutual funds and other types of professionally managed investments. LG 5-Discuss the merits of investing in mutual funds, the types of funds available and the investment objectives these funds seek to fulfill. LG 6-Describe the variables that should be considered when selecting funds for investment purposes. Learning Goals

3. 11 - 3 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Internet Links and On-Line Resources What’s your risk tolerance. Take quizzes at the Investor Education Fund.Investor Education Fund You can compare the risk of a particular stock or your portfolio with the overall market with this tool at RiskGrades.RiskGrades Starmine Investor – discover which securities analysts have been most accurate in estimating a company’s earnings.Starmine Investor Find the meaning of investment terms at InvestorWords.com.InvestorWords.com Learn about the American Depositary Receipt (ADR) market at J.P. Morgan’s site.J.P. Morgan’s Financial Times website for information on overseas business news.Financial Times Learn about investment clubs at investorguide.investorguide Find out what companies offer Dividend Reinvestment Plans at Computershare Website. Computershare Website “Investing in Bonds” at the Bond Market Association’s website.“Investing in Bonds” Learn about Canada’s mutual funds through the Mutual Funds Dealers Association of Canada Website.Mutual Funds Dealers Association of Canada Website Brill’s Mutual Fund Interactive Interviews with top mutual fund managers.Brill’s Mutual Fund Interactive Interviews Learn more about iShares through Barclays.Barclays Visit EFTConnect.com to get price quotes and find the right ETF for you.EFTConnect.com Mutual fund data on Morningstar.caMorningstar.ca Web Links

4. 11 - 4 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Key Chapter Terms and Definitions Business risk Financial risk Market risk Purchasing power risk Fixed-income securities Interest rate risk Marketability risk Liquidity risk Event risk Risk-free rate of return Desired rate of return Residual owners Proxy Dividend yield Stock dividends Book value Net profit margin Return on equity (ROE) Earnings per share (EPS) Price/earnings ratio (P/E) Beta Dividend reinvestment plan (DRP or DRIP) Dividend reinvestment plan (DRP or DRIP) Coupon Mortgage bond Equipment trust certificate Debenture Terms

5. 11 - 5 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Key Chapter Terms and Definitions … Sinking fund Call feature Serial bond Real return bond (RRB) Corporate bond Strip or zero coupon bond Conversion privilege Conversion ratio Conversion value Conversion premium Junk bond Premium bond Discount bond Current yield Yield to maturity Pooled diversification Open-end investment company Open-end investment company Net asset value per share (NAVPS) Net asset value per share (NAVPS) Closed-end investment company Closed-end investment company Exchange-traded fund (ETF) Load fund Low-load fund Back-end fund No-load fund Portfolio management fee Management expense ratio (MER) Management expense ratio (MER) Automatic investment plan Automatic reinvestment plan Systematic withdrawal plan Conversion (exchange) privilege Conversion (exchange) privilege Terms

6. 11 - 6 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Business Risk The degree of uncertainty associated with a firm’s earnings and subsequent ability to pay interest and dividends. Terms

7. 11 - 7 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Financial risk A type of investment risk with the mix of debt and equity financing used by the issuing firm. Terms

8. 11 - 8 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Market risk A type of investment risk associated with the price volatility of a security. Terms

9. 11 - 9 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Purchasing power risk A type of risk resulting from possible changes in price levels, which can have a significant effect on investment returns. Terms

10. 11 - 10 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Fixed-income securities Securities such bonds, notes, and preferred stocks that offer purchasers fixed periodic returns. Terms

11. 11 - 11 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Interest-rate risk A type of risk, resulting from changing market interest rates, that mainly affects fixed income securities. Terms

12. 11 - 12 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Marketability risk The risk of not being able to find a buyer for an investment. Terms

13. 11 - 13 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Liquidity risk A type of risk associated with the inability to liquidate an investment conveniently and at a reasonable price. Terms

14. 11 - 14 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Event risk The risk that some major, unexpected event will occur, leading to a sudden, substantial change in the value of an investment. Terms

15. 11 - 15 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Risk-free rate of return The rate of return on short- term government securities, such as Treasury bills, that is free from any type of risk. Terms

16. 11 - 16 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Desired rate of return The minimum rate of return an investor feels should be earned in compensation for the amount of risk assumed. Terms

17. 11 - 17 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Residual owners Shareholders of the company, they are entitled to dividend income and a share of the company’s profits only after all of the firm’s other obligations have been met. Terms

18. 11 - 18 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Proxy A written statement used to assign a shareholder’s voting rights to another person, typically one of the company directors. Terms

19. 11 - 19 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Dividend yield The percentage return provided by the dividends paid on common stock; calculated by dividing the cash dividends paid during the year by the stock’s market price. Terms

20. 11 - 20 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Stock dividends New shares distributed to existing shareholders as a supplement to or substitute for cash dividends. Terms

21. 11 - 21 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Book value The amount of shareholders’ equity in a firm; determined by subtracting the company’s liabilities and preferred stock value from its assets. Terms

22. 11 - 22 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Net profit margin A key measure of profitability that relates the net profits of a firm to its sales; shows the rate of return the company is earning on its sales. Terms

23. 11 - 23 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Return on Equity (ROE) ROE captures the overall profitability of the firm; it is important because of its impact on the growth, profits, and dividends of the firm. Terms

24. 11 - 24 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Earnings per share (EPS) The return earned on behalf of each share of common stock; calculated by dividing all earnings remaining after paying preferred dividends by the number of common shares outstanding. Terms

25. 11 - 25 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Price/earnings ratio (P/E) A measure of investors’ confidence in a given security; calculated by dividing market price per share by earnings per share. Terms

26. 11 - 26 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Beta An index of the price volatility imbedded in a share of common stock; provides a reflection of how the price of the stock responds to market forces. Terms

27. 11 - 27 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Dividend Reinvestment Plan (DRIP) A program whereby shareholders can choose to take their cash dividends in the form of more shares of the company’s stock. Terms

28. 11 - 28 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Coupon Feature on a bond that defines the annual interest income the issuer will pay the bondholder. Terms

29. 11 - 29 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Mortgage bond A bond secured by a claim on real assets, such as manufacturing plant. Terms

30. 11 - 30 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Equipment trust certificate A bond secured by certain types of equipment, such as railroad cars and airplanes. Terms

31. 11 - 31 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Debenture An unsecured bond issued on the general credit of the firm. Terms

32. 11 - 32 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Sinking fund A provision in a bond that specifies the annual repayment schedule that will be used to pay off the issue. Terms

33. 11 - 33 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Call feature A feature included in a bond (or preferred stock) issue that allows the issuer to retire the security prior to maturity at some specified, predetermined price. Terms

34. 11 - 34 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Serial bond An issue, usually a municipal bond, that is broken down into a series of smaller bonds, each with its own maturity date and coupon rate. Terms

35. 11 - 35 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Real Return (RRB) A type of government bond that provides protection against inflation by adjusting investor returns for the annual rate of inflation. Terms

36. 11 - 36 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Corporate bond A bond issued by a corporation. Terms

37. 11 - 37 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Strip or zero coupon bond A bond that pays no annual interest but sells at a deep discount to its par value. Terms

38. 11 - 38 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Conversion privilege The provision in a convertible issue that stipulates the conditions of the conversion feature, such as the conversion period and conversion ratio. Terms

39. 11 - 39 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Conversion ratio A ratio that specifies the number of shares of common stock into which a convertible bond can be converted. Terms

40. 11 - 40 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Conversion value A measure of what a convertible issue would trade for if it were priced to sell on the basis of its stock value. Terms

41. 11 - 41 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Conversion premium The difference between a convertible security’s market price and its conversion value. Terms

42. 11 - 42 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Junk Bond Also known as high yield bonds, these are highly speculative securities that have received low ratings from DBRS, Moody’s, or Standard & Poor’s; the low ratings mean the issuers could have difficulty meeting interest and principal payments as they come due. Terms

43. 11 - 43 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Premium Bond A bond that has a market value in excess of par; occurs when interest rates drop below the bond’s coupon rate of return. Terms

44. 11 - 44 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Discount Bond A bond with a market value lower than par; occurs when market rates are greater than the bond’s coupon rate. Terms

45. 11 - 45 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Current yield The amount of current income a bond provides relative to its market price. Terms

46. 11 - 46 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Yield to maturity The fully compounded rate of return a bondholder would earn if he or she held it to maturity. (Includes both coupon interest income as well as any capital gain/loss the investor earns on the purchase price.) Terms

47. 11 - 47 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Pooled diversification A process whereby investors buy into a diversified portfolio of securities for the collective benefit of the individual investors. Terms

48. 11 - 48 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Open-ended investment company A company that can issue an unlimited number of units at a price based on the current market value of the securities it owns; also called a mutual fund. Terms

49. 11 - 49 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Net asset value (NAV) The price at which a mutual fund will buy back its own units (shares); NAV represents the current market value of all the securities the fund owns, less any liabilities. Terms

50. 11 - 50 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Closed-end investment company An investment company that issues a fixed number of shares, which are themselves listed and traded on an organized securities exchange. Terms

51. 11 - 51 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Exchange-traded fund (ETF) A type of mutual fund that trades as a listed security; usually structured as an index fund that is set up to match the performance of a certain segment of the market. Terms

52. 11 - 52 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Load fund A type of mutual fund on which a transaction cost (associated with the purchase of units/shares) is levied. Terms

53. 11 - 53 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Low-load fund A type of mutual fund in which commissions charged on purchases of shares range between only 1 and 3 percent of the purchase price. Terms

54. 11 - 54 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Back-end fund A commission charged for redeeming mutual fund units/shares. Terms

55. 11 - 55 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions No-load fund A mutual fund on which no transaction fees are charged. Terms

56. 11 - 56 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Portfolio management fee A fee paid to the professional money managers who administer a mutual fund’s portfolio. Terms

57. 11 - 57 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Management expense ratio (MER) The total of all management fees reported as a percent of the total fund assets. Terms

58. 11 - 58 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Automatic investment plan A type of automatic savings program that enables an investor to systematically channel a set amount of money into a given mutual fund; it provides investors with a convenient way to accumulate capital (also known in the industry as a RIP – regular investment plan) Terms

59. 11 - 59 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Automatic reinvestment plan A type of plan offered by most mutual funds that allows shareholders (unitholders) to elect to have dividends and capital gains distributions reinvested in additional fund units/shares. Terms

60. 11 - 60 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Systematic withdrawal plan A type of plan offered by mutual funds that allows unitholders/shareholders to be paid specified amounts of money each period. Terms

61. 11 - 61 Chapter 11 – Investing in Stocks, Bonds and Mutual Funds Definitions Conversion (exchange) privileges A feature offered by many investment companies that allows investors to switch from one mutual fund to another within a family of funds. Terms

62. 11 - 62 THE END!