Chapter 21

Stocks, Bonds, and

Mutual Funds

McGraw-Hill/Irwin

2008 The McGraw-Hill Companies, All

Rights Reserved

#21Stocks, 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

21-2

#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

21-3

#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

21-4

Stocks
Stock - Shares of
ownership in a company

Preferred Stock - Does not

allow voting rights, but gives
preference over common
stockholders in dividends
21-5

Common Stock - Stock

that allows owners to have
voting rights

Cumulative preferred stock entitles its owners to a specific

amount of dividends in 1 year

Stocks
Stockholders

Elect

Dividends Payments to
shareholders from
profit

Board of Directors

Elect

Officers of
Corporation
21-6

Dividends in arrears
- Payments owed to
cumulative
preferred
shareholders

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.
21-7

Stock Quotations in Newspapers

52 weeks
HI
LO
43.95 32.85

21-8

STOCK (SYM)
Home

DPT

YLD
DIV % PE
.90

2.3

VOL
100s

LAST

14 178416 39.92

Stock Quotation Calculations

Stock yield = Annual dividend per share = $.90 = 2.3%
Todays closing price per share $39.92

Earnings per share =

Annual earnings
.
Total number of shares outstanding
*Earnings Per Share are not listed on the stock quote

PE Ratio = Closing price per share of stock = $39.92 = 14

Annual earnings per share
$2.85

21-9

Dividends on Preferred and Common Stock

Stock records for You Corporation show the following:
Preferred stock issued: 20,000 shares.

In 2009, Sony paid no dividends

Preferred stock cumulative at $.80 per share.

Common stock issued: 400,000 shares
dividends.

In 2010, Sony paid $512,000 in

2009

2010

Dividends paid

Dividends paid

Preferred stockholders Paid:

Paid for 2009

$512,000
16,000

Owe: 20,000 x $.80 = $16,000 Paid for 2010

Common Stockholders
0
Total dividend

16,000
32,000
512,000

Paid preferred for 09 & 10

Common Stockholders
21-10

$480,000
400,000 shares

-32,000
$480,000

= $1.20 per share

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
Total receipt
Total cost
Net Gain
Dividends
Total Gain
21-11

$5,445.00
-4,292.50
$1,152. 50
+ 42.00
$1,194.50

Sold
200 shares at $27.50 = $5,500
Commission at 1%
= - 55
Total cost
$5,445
$1,194.50
$4,292.50

(200 x $.21)

27.83% Return on
Investment

Bond Quotations in Newspapers

Bonds
IBM 8 3 19
8

Current
Yield

Vol.

7.0

Net
Close

change

120 1
2

*Bonds are stated as a percent of face amount

Yearly Interest = Face value of bond x stated yearly interest rate

$83.75 =
$1,000
x
.08375
21-12

+1

Bond Quotations in Newspapers

Bonds
IBM 8 3 19
8

Current
Yield

Vol.

7.0

Net
Close
120 1
2

change
+1

Yearly interest: = $83.75 = (.08375 x $1,000) = .0695 = 7%

Cost of bond:
$1,205
(1.205 x $1,000)
21-13

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 Sues interest? (Remember that in dollars
120 is $1,205)

5 bonds x $83.75
interest per bond
per year
5 x $1,205
21-14

$418.75 = 6.95% = 7%
$ 6,025

Why Investors Choose Mutual Funds

Diversification
Professional management
Liquidity
Low fund expenses
Access to foreign markets

21-15

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 funds investment - Current liabilities
Number of shares outstanding
21-16

Commissions: Mutual Funds

Classification
No-load (NL) fund

Commission charge

Offer price to buy

No sales charge

NAV

(Buy directly from investment company)

Low-load (LL) fund

3% or less

NAV + commission %

8 1 % or less
2

NAV + commission %

(Buy directly from investment company or from a broker)

Load fund
(Buy from a broker)

21-17

Mutual Fund Quotations in Newspapers

Name of
Fund

21-18

FUND

YTD

NAME

NAV

CHG

Grln P

18.43

-0.09

NAV plus the sales

commission

% RET

Fund return
this year

4.1
Changes in NAV
versus the previous day