Chapter 20 Investments

Copyright © 2000 by Harcourt, Inc.

Chapter 20, Investments

Section I Stocks20-1 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 Bonds20-6 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.

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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.

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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 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

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

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

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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.

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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

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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 Conservative investmentSpeculative investments Diversified portfolioStocks, or equities ShareStock certificate Publicly held corporationShareholder DividendsPreferred stock Per valueNo par value Cumulative preferred stockDividends in arrears Current yieldPrice-earnings ratio Proceeds Stockbroker Stockbroker’s commissionFull-service broker discount brokerBond Secured bond

Chapter 20, Investments (Cont.)

Unsecured bonds Convertible bondsCallable bonds Coupon ratePremium DiscountAccrued interest Mutual fundNet asset value (NAV) Offer priceLoad Front-end loadBack-end loadReturn 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) =