General Mathematics

1
Basic Concepts of Stocks and Bonds – Part002

Basic Concepts of Stocks and Bonds – Part002

This module tackles topics on Stocks and Bonds.

Course Module Objectives:
At the end of this module, the learner should be able to:
1. Interpret the theory of efficient markets
2. Illustrate business and consumer loans
3. Distinguish between business and consumer loans
4. Solve problems involving business and consumer loans (amortization,
mortgages)
Given your knowledge on stocks and bonds, discuss in class how you can
profit on the buying and selling of these financial options.

Theory of Efficient Markets

Before we discuss the theory of efficient markets, let us check some
definitions.
1. Fundamental Analysis – this is the analysis of different public information
about a stock.
2. Technical Analysis – this refers to the analysis of patterns and historical
data (prices) of stocks.
The theory of efficient market was developed by Eugene Fama in 1970. This
theory states that the stock prices reflect all available information about the
stock (including historical information). This hypothesizes that the stock
prices are accurate. Thus the slogan “Trust Market Prices” was coined to
support the theory. This concept assures the public that no overvaluing or
undervaluing is happening to stock prices.
The question now is if the theory is true. In some market, like in the
Philippines, some investors might argue that there is a pattern in the market
prices. Some investors argue that the patterns can be studied to be able to
predict the market prices in the future. If this is true, then the risk of
investing in stocks will be lesser than what we have now. This is an issue
which is open for discussion.
Create two teams in class. Have one team in favor of the theory of efficient
markets and the other on the other side. Discuss the validity of the theory
and make sure that points are thrown to support your claims. Your teacher
will choose which side presented a stronger argument.
Use the following arguments:
Course Module
 1. We can beat the market.
2. We cannot beat the market.

Basic Loans
Suppose your parents wanted to buy a house for your growing family, they
went to several banks and financial institutions to check their options. They
decided to apply for a home loan from a bank.
Definition of Terms:
1. Business Loan – money lent to fund for business transactions.
2. Consumer Loan – money lent to fund personal or family expenses.
3. Collateral – assets used to secure a loan.
4. Term of the Loan – time to pay the entire loan.
Consumer loans on the other hand is used for personal or family expenses.
These loans do not usually require collaterals as the money lent for
consumer loans are generally smaller. Moreover, the interest rates are
normally lower for consumer loans and the term are longer.
Business loans can be used to start a business or to expand businesses.
Business loans often require collaterals in forms of real estate or other
investments.

Solving Problems on Business and Consumer Loans

Definition of terms:
1. Amortization Method – method of paying for the loan on installment
basis.
2. Mortgage – loan, secured by a collateral, payed at specified terms.
3. Chattel Mortgage – mortgage on movable property (i.e. vehicles).
4. Collateral – assets used to secure a loan.
5. Outstanding Balance – any remaining debt at a specified time.
Example 1
Mr. Garcia borrowed Php 1,000,000.00 for the expansion of his business. The
effective rate of interest is 7%. The loan is to be repaid in full after one year.
How much is to be paid after one year?
Solution:
This is treated as a simple interest with term = 1.
( ) ( )
Example 2
Ms. Samson borrowed Php 1,200,000.00 for the purchase of a car. If the
monthly payment is Php 30,000.00, how much is the interest paid for a term
of 5 years?
Solution:
Since the monthly payment is Php 30,000.00 for 5 years,
 General Mathematics
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Basic Concepts of Stocks and Bonds – Part002

Example 3
If your house was bought for Php 3,000,000.00 and the bank required 20%
down payment, find the amount of the mortgage you took on the bank for
your house.
Solution:
First thing to do is to compute for the down payment for the house.

In solving problems on basic loans, you need to use prior knowledge on

interest and annuities as the computations in basic loans will most often use
formulas from interests and annuities.

References
Albay, Eduard M., et al., (2016). General Mathematics. Makati City: Diwa
Learning Systems, Inc.

Course Module