Download Chapter 20, Section I

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.
20-2 Reading Stock quotations.
20-3 Calculating current yield for a stock.
20-4 Determining the price-earnings ratio of a stock.
20-5 Computing the cost, proceeds, and gain (loss) on a
stock transaction.
Section II Bonds
20-6 Understanding bonds and reading bond quotation.
20-7 Commuting the cost of purchasing bonds and the
proceeds from the sale of bonds.
20-8 Calculating the current yield for bonds.
Chapter 20, Investments (Cont.)
Section III Mutual Funds
20-9 Understanding mutual funds and
reading mutual fund quotations.
20-10 Calculating the sales change and
sales charge percent of a mutual fund.
20-11 Calculating net asset value of a
mutual fund.
20-12 Calculating the number of shares
purchased of a mutual fund.
2013 Calculating return on investment.
Everybody’s Business
History has demonstrated repeatedly that a welldiversified portfolio of investments based on
careful planning and a focused strategy reduces
risk and provides an opportunity for solid
returns.
Changing investments too frequentlyoverreacting 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
2000. 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 oneeight, or 12.5 cents. With decimal pricing, the
spread could be as little as a penny.
20-3 Calculating Current Yield for a Stock

Steps to determine the Current Yield of a
Stock:
–
Step 1. Divide the annual dividend per share
by the current stock:
Current yield = Annual dividend per share
Current price of the stock
–
Step 2. Convert the answer to a percent,
rounded to the nearest tenth.
20-4 Calculating the Price-Earnings Ration
of a Stock a Stock

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:
Price-earnings ratio = Current price of the stock
Earnings per share
–
Step 2. round answer to the nearest whole
number.
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.:
Price per bond = Current market price + Accrued interest + Commission
–
–
Step 2. Calculate the price to purchase the bond:
Step 3. Calculate total purchase price:
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:
Current yield = Annual interest
Current market price
–
Step 3. Convert the answer to a percent,
rounded to the nearest tenth.
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.
Net asset value (NAV) = Total assets – Total liabilities
Number of shares outstanding
–
Step 2. round the answer to dollars and cents.
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 risk
Speculative investments
Stocks, or equities
Stock certificate
Shareholder
Preferred stock
No par value
Dividends in arrears
Price-earnings ratio
Stockbroker
Full-service broker
Bond
Conservative investment
Diversified portfolio
Share
Publicly held corporation
Dividends
Per value
Cumulative preferred stock
Current yield
Proceeds
Stockbroker’s commission
discount broker
Secured bond
Chapter 20, Investments (Cont.)
Unsecured bonds
Callable bonds
Premium
Accrued interest
Net asset value (NAV)
Load
Back-end load
Return on investment (ROI)
Convertible bonds
Coupon rate
Discount
Mutual fund
Offer price
Front-end load
Chapter 20
Stocks
Dividend per share (preferred) = Par value x Dividend rate
Dividend per share (common) =
Total common dividend
Number of shares (common)
Annual dividend per share
Current yield =
Current price of stock
Price-earnings ratio =
Current price per share
Earnings per share
Gain (or loss) on stock = Proceeds - Total cost
Copyright © 2000 by Harcourt, Inc.
Chapter 20
“Formulas”
Bonds
Price per bond =
Proceeds =
Current
+ Accrued + Commission
market price
interest
Current + Accrued interest + Commission
market price
Current yield =
Annual interest
Current market price
Copyright © 2000 by Harcourt, Inc.
Chapter 20
“Formulas”
Mutual funds
Mutual fund sales charge = Offer price - Net asset value
Sales charge percent = Sales charge / Net asset value
Net asset value (NAV) = Total assets - total liabilities
Number of shares outstanding
Total investment
Number of shares purchased =
Offer price
Return on investment(ROI) =
Total gain
Total cost of purchase
Copyright © 2000 by Harcourt, Inc.