en — —— 1 NVESTMENT MATHEMATICS Stocks, Bonds and Mutual Funds sanvial risk isthe chance ech cy ra rtunities range from low-risk en Seenifcates of deposit, to high-r, the right investment depends on fer making or losing money on an investinent. conservatives you stand to gain or lose. Investment sk speectve investments, such as government bonds $Peculative investments, such as stocks. Selecting Personal circumstances as well as general market vestments are based on liquidity, which indi we. how much risk is Which indicates how easy it is to get your money outs fnestment advice is available from sngjrettr® how much you can expect to eam. de itis generally woreda SeKbrokers, Financial planners, and many other ree totes bande, (eteed that over the long run, a diversified portfolio, with a ainture OF stocks, bands, cash equivalents, and sometimes, ther types of investments, is asensible choice. Determining the correct portfolio mix is a decision that should be tased on the amount of assets available, the age of the investor, and the amount of desired. In this chapter, three forms of investment—stocks, bonds, and mutual funds will tediscussed STOCKS Understanding Stocks and Reading Stock Quotations Corporations are built and expanded with money known as capital, which is raised by issuing and selling shares of stock. Stocks represent ownership shares of a corporation. Ownership in a company is measured by the number of shares an investor owns. These investors, called stockholders, acquire not only a share of the ownership of the corporation but also the right t ive income in the form of dividends. Each 10 recei ownership portion, or share, is represented by a stock certificate, in the business section of most newspapers provide f what happened in the stock market during the previous stock quotation table from the Philippine Stock Exchange i 1 illustration purposes. The listing reflects what transpired during a specie tring de or ‘As can be seen, stocks are classified according to the type of business (i.e, BE dy. d food, beverage, and tobecco) to which they belong and are listed alphabetically. Stock quotation tables found investors with a daily summary Of v trading day. A portion of a typical 9-12 | eeeeaagae ees Saaeeaeae 8 egeggaasg | ~ af | 298292288 é Qegeeagae g | ZRSS953e z REESE SSR ~ 3 ger gesege 3 | gereaees aL eegaazece ~ 8 BREASRIES ~ 2| |saasgaggs 8) |ER2232938| 3| |sgeseansse |i o 8) |saeesesea | 8 z|2| egegeases & ee egeezanse|§ “£G) | SESPRREES) ©) pecessseszagass Baggegeee ar | ~ sLJEXEUEY | |ecsssgssequeneg Sggcseseessnay ig Ses & se gig 522.2 sz 2 fez 2 s S828 £2825 23, . 8 | S2eey2e3e | S2438fece2 $38 S | S8ozeesae | bs bauce ges 82s Sa5s28ss | i2eehs5gesese * seggegees 5 seene 3 Ssgagceea | S23938ssszggeag 2 Rerah oe gegeagges aS Beeneneen "E | HRGRRGES | A88geaeqguagegs 92 n ent ach col HY Inthe stock gu tation i : explained below, 1.8 b, 8 Wethe Hi 8d Loy. Te ihe non ast 52 weeks "ehest and lowest raded prices ofa stock forthe ec Name The tte of be se company, S EPS (earnings per share) Car shares outstanding, Higher cart Ue by dividing afertax income by auniber of Volume. The total number of shares ec, vets . I in igher tock value t £ es ig eid is Close. The closing pice of the trading done SPEC tang ero i ‘ Ih money is tumed over fem ae 1% Change (Percent change), Calculated as (jefe. A nopmive value indicates tat >” the closing pie forthe day i lower than hat forthe pons aay im PE ratio (rice earnings rai), Caleulted as Va unictes tow much an investor LE pay Company's earning power. An ‘above 20° PE ratio reflects investor = eptimism ato higher fate eangs ofthe some From the stock quota ted for Bank ofthe Phil n table on. the previous page, explain the pine Islands (BPI) and Universal Robina. BPI is corporation's stock opened at P76.20. The high for the day was P7620 white the low, ‘sted second under the Banks classification. On that specific day, the 75.00. The stock closed at P76.10, 690,780 shares of stock were traded during the day. (On the same day, Universal Robina stock's (second line under Food, Beverage and ‘Tobacco classification) open price was 59.90. The day's high was 60.75 and low 58.85. It finally closed at P60,60. 1,173,480 shares were traded throughout the day. Scripless Trading The Philippine Central Depository, tne. established in March 1995, provides the Securities settlement system for both debt end equity instruments of the Philippine Stock Exchange (PSE). Its computerized book-entry-setlement system paved the way for a safe and efficiem scriples trading, Seripless trading isthe shift from physical transfer of stock certificates to electronic book-entry of securities transactions. Investors who buy shares at the PSE will not receive any stock certificate under this system although they ‘can specifically request fora certfiat from their broker. ne creas Dividends on Preferred and Common Stock ler will receive dividends, Generally, if the company does well, the investor oF sharchold : Which are distributions of the company’s profits. If the share price goes up, th Stockholder can sell the stock ata profit, 93sate peso est ed we conen 2 segs make mom). the price of the stock May the company is doing With peered stock the dividends ae Fe, exalless Tnoien When th bead odes o scone 3 eng sor. censon ockhoiders as far as posibly Betting Back ut a par value, When the stock has @ par her with or wot aan et ) per year. When par prefered stock has no par Section 6 of the Corporation Code of the Philippines states that ke may be issued only as par value shares. fends each year. When no Cumulative preferred stock receives di means the stockholders receive only Which means the stockholders may receive a dividends if the company does well. Convertible preferred means the stock may be exchanged fora specified number ‘of common shares inthe future. Cash andlor property dividends received by a resident citizenstockholder from a domestic ‘to 10% final tax effective year 2000. The amount the stockholder will receive shall be net ofthe 10% final tax ‘The steps to distribute dividends on prefered and common stock follow: 1. Ifthe prefered stock is cumulative. any dividend that are in arears are paid fist; then the prefered dividend is psd forthe curren period. When the dividend pet share is tated in pesos (no-par 0 Step 2. When the dividend per share is stated as a percent (par stock), multiply the par valve by the dividend rae Dividend per share (preferred) = Par value * Dividend rate Calculate the total amount of the preferred stock dividend by m. ing the num of preferred shares by the dividend per share ae Total preferred dividend = Number of shares * Dividend per share 94 Stock dividend by fend subsracting the total prefered stock Total com On dividend = a he dvi Tet digend ~ Total peered dividend fi vidends per shace fo stock dividend bythe numer graye common sock by dividing the total commen es of common stock. Pividend pe share Common) = Teal commen d ‘Wurnber of shi 7 85 of common stock outstanding. Ifa red by the company directors last year, what are Se pany directors last year, what are the since Kash ferred ste dividend. God the common shareholders Step eee receive the entire late the amount of dividends due the prefered shareholders andthe dividend per share sfeonmen sock Since the prefered divided is sted in pesos (P50 per share), the frst step dispensed with. Proceed to step 2. pees ps » - ‘Toal preferred dividend = Number of shares » Dividend pr share Total preferred dividend = 60000 50 = B30.) 4. Total common dividend = Tova dividend — Total preferred dividend Total common dividend = 300,000 ~ 30,000 = 270,000, 4 Dividend per share (common) = 270000 Tol comnon dividend . = Thom ~ C2ldpecsbacs ‘No ost (commen) Mog Company has 100,000 shares of P100 par value, 6%, cumulative lustration: wan preferred stock and 2,500,000 shares of common stock. Although no di declared last year, a P5,000,000 dividend has been declared this year. Calculate the mount of dividends due the prefewed shareholders and the dividend per share of ‘common stock, cumulative, and the company did not pay dividends "Because the refered sto Sf eed tthe dvidnds tm aes and the t year, the preferred dividends forthe curent period. value * Divine Po a 6 = POD Dividend per share (prefered) = Pa end per share (prefered) * 100 * 6 9sea Prefered i ered dividend Teta common dividend = Teal dividend ~ Total pete Tota commensividené = 5.000,00 ~ | 20Qae0 = #30000) 4 isd pe share (common) = Current Yield for a Stock ‘One way to measure how much an investor is earning om & rent value current price of he stock. When & 3 pays no dividend, the The curren ned by dividing the an came id = Ati ie ‘Than Pink Corporation stock, which ration: Calculate the current 34.50 per share, vidend of PI.70 per yea = EO. ogg = Crrentyiekd = 7% = 0493 = 493% Price-Earnings Ratio of a Stock ly used tools for analyzing a stock isthe prce-to-earnings ratio, ¢s rice-earnings ratio or P/E ratio. This number shows the iship between the price of a stock and the company’s earings for the past 12 . Price-earnings ratio is found by dividing the current price per share by the earnings per share. Basis earings pe sare is determined by diving net ince by common shares Outstanding. Earnings should be the net income after. deducting, “ivtleat ca peter Soek. Common shares oustundng sold be te eMeb nae ee et shares oustanding dring he paid. Now thc etngs pe ferbuabe to vey common Sock ou ‘hose shares ar pully ded re requed to se earings per share information. 7 use it reflects “buyer confidence” 96 1 price-eamings ratio of we "Stock iscomputed as felows 1. Divide the cen rc ofthe sy the earings per share forthe past 12 months Price. earings rag = Coctent price per share ne pie persue 2 Round ansver ‘othe neues hoe sunber (may be we ratio, x1), ystration: Alix stock is cure ‘Mot P60 yar enc mgt PIOA.7S. Ifthe company had earnings pet =-ermings rato of the stock. Price-earings ratio = Curent price per share amings pr share ean « 182 Preeeingrlo = 25 ayn = 39 or 201 Te ate shows hat investors are curenty wing to pay 29 times the earnings for 1 Cost, Proceeds and Gain (or Loss) on a Stock Transaction the hope of making money. Although Investors take on the risks of purchasing stocks Wvestment, over the years stocks have they are more risky than many other types of shown they are capable of generating spectacular etums in some periods and steady returns in the long run. One investment strategy is to buy stocks and keep them forthe dividends paid by the company each quarter, Another strategy is to make money from ‘the profit (or loss) of buying and selling the stock. Simply put, investors generally want to buy low and sell high. and vary from broker to %, Brokerage commission rates are compet broker. Nowadays, commission rates range from 0.25% 10 ing. price less beokerage commission. ‘The proceeds from sale less the cot of purchasing stock is the gain or loss, Sects Cla Ceprion ofthe Pippin SCP) Fe, Samp (OST an a ter css ele eo Soe Sa es ioe “1Buying Tra and fon Aman decides to buy a stock whose market pri P10.0 PLO. Based on the Band Lt Tol, the inno numbe 100 shares. in quired cash outfow willbe a8 Sy bought. Current market 000 ess charges. Less: Broker's Commission (1 Net Cash Receivable Return on Investment investor. year (net the investor, minus, of course, any commissions and other fees. ror = —Netgain + Total dividends _ Total cost of stock purchase Using the data in the previous and assuming that a total of is caleulated as follows: one 12,805 = 03897 or 38.97% Ben's ROI at 38.97% is a very good return 98 0! ‘payments ata stated ‘of debt whereby one party called the ‘A bond is evidenced by @ ween the isuer and investor is comained in agreement wn a5 bond indent he base difference between on a Tae rout oF interest re th stock, the investor becomes a creditor. Bonds omises 10 pay a specified vation: while with bonds, the inveso ‘Securities because’ the issuer pre smd a ihe bond a nse by wae iy Clay ASOPOMN thy may ep nes dutoied broker and tanks Gerry, bonds oe nee lr the quoted price in the market pertains to bonds it means percent ofthe face value of| the, bonds. For instance, ifthe investment in P2.000,000 face Company, costing PI,700,00 computed by mul Bonds pay a fixed interest rte, also known as the coupon rate. This rate is a fixed ~ percentage of the face value that willbe paid tothe bondholder on a regular basis usually semi-annwally such as January | and July 1, of February | and August 1, oF March 1 and September 1, and so on, During the period between the issue date and the materity date, bond prices fluctuate in the opposite direction of prevailing interest rates. Assuming you buy a bond with & coupon rate of 8%. If interest rats inthe marketplace fall to 7%, newly issued bonds Will have a rate lower than yours, thus making yours more attractive and driving the price above the face value, When this occurs the bonds are said to be selling ata premium. (On the other hand, if intrest rates rise to 9%, new bonds would have a higher rate than ese atactive and pushing the price down, below face. IF ata discount, At maturity, the bond retums twits face value. 99For example, a company mi 2025. The bond (P1000 x 07 whether the bond was bought al the company repays the loan by Ua er at2 Be pci parte ase as J re backed y 8 ed bond aro known a debentures, ay, some. bonds aang portion = oe ere no, exchanged Saiune ponds ave Secur Unsecured bon ich are payable in those which have a term bonds. Cost, Proceeds and Gain (or Loss) on a Bond current market price plus accrued interest, note, bom pay inet seman sch 8 on Janay 1 and ey (When ods asad beeen sued net pen dts the ber mS py te inert acct fom st payment dnt he sel This erent do the Seley is known a the aceraed intrest The crud es onthe bond calcltd sig thefomuls f= PRE where Pte fe va oth bnd sth oupon ae, and 8 the number f dye sine lst payment date ded by 260. When tine sted int tte denoninatr 12 Similar to stocks, when bonds are bought and sold a brokerage charge is normally added the price ofthe bond. Taxes (i. documentary stamp tax) and other charges related to + the acquisition of the bond form par of the cost. The proceeds from sale of bonds is determined by deducting from the sales price the related broker's commission, taxes and other fees. Gain (or loss) ftom a bond transaction isthe difference between the proceeds from the sale and the cost of purchase. From the accounting viewpoint, the difference between ‘ales proceeds and the purchase price of the bond is nat ll gain but is a combination of interest income snd gin onsale Gains excluded zed from sale of bonds with a maturity of more than five (5) years shall be rom gress income and consequently exempt from income tax. Current Yield for a Bond Just as with stocks, the eurrent investment based on the current a eld of a bond is a simple measure of the return on ‘®t price. When Fonds are purchased at face, the 910 err is equal ield » i ). with & coupon rate gp uP” te, 1, Calcul 2, Divide the annual ite ata premium of 107.25, = Face vale « Tana * Coupon re = 0675 = P6750 We Pree percent = 0128 = P1072 50 (Curent yielg = Annual interest _ Girens Curent yield = 5250 ggg = Mel “Tanase” 009 = 6.29%MUTUAL FUNDS does stock mathe Mario Francisco wants to invest some money ith (KS are Booed feels are good issues new shares ge between 02510 ‘mutual fend does not charge investors this fee. The load r based on the amount invested. Some mutual funds charge early redemption fee at Ths is to dccurage the mvestr from redeeming hs shares ear than the ‘minimum holding period Management, adsisory and distribution fees range betscen 0.75% the net asset salue ofthe fund Interpreting @ Mutual Fund Quotation The following illustration shows « mutual fund quotation and Mastration: Eq) y Fund since January 1 artondate pee Ferceatage return), The Fund has a 30.31% retum Return on Investment Armee Be made a msestment f dividends pa return on investment th Fund a mut ted ual fund To determine sehether she had (2 satsulate her retum om investment The return on ASE MM Net asset Yalue and on the las used to calculate a mutual fund's fend erations Beginning year NAV. Fens pet asset valve on January | was P100. During. the year the tuted PES per st Pareto vestry At the end ofthe year. the net asset SULA the FEtum om erestment Retum on investment = tons Repinming-year NAV year NAV lose The return on investment is 2046 osgevieW QUESTIONS Liquidity. risk and retu each. ™ are factors being '8 considered by an investor. Briefly discuss what does stock ownershi iP in aco poration re Mn represent? 5, fine the followin and volume. 8 terms whic h appear in a stock listing: open, high, low, close what does scripless trading mean? How do common stock an 1d preferred stock differ in terms of dividend distribution? Differentiate the followin, participating and coments] of Prefered stock: cumulative, participating, non How is the current yield for provide the investor? 4 stock determined? What significant information doe What does the price-earnings ratio of a stock signify? How is it computed? The cost of purchasing stock includ. een ludes not only the purchase price. What other costs When selling stocks, the sales price does not equal the proceeds. Why is this so? 11. Differentiate stocks from bonds. Briefly discuss the following types of bonds: secured, debenture, convertible, callable, serial and term. May the current yield equal the coupon rate? Explain. 14, How does a mutual fund work? 1S, Distinguish a load mutual fund from @ no-load mutual fund. 915—— : pe ee [NAME TOR SOR | ON: SCORE: {Section PROFESS — ses UL rosters Problema rocks ce |_| eth 58 Cons dpe on company Conon " the tock qntaton in Chapin te as Sb eM Wheneer ST phils at changes or PE ase. SS a SE anon sate 1 Alesha seen samen 5% P30 n2— e weeks 2” ‘o 90) Piao omy Te tone a. ig rie orth pas 52 nests 22 cum jaa mes Kee, 'b. Open price forthe day °° «. Value of stocks 2. Jalibee Foods Corp. Ni as 400.00 shares of common stock outstanding. as declared by the company directors last year, what isthe «Low price forthe past 52 wecks_® ‘ dividend per share of common sack? b. High price forthe da ar «Ye change from yesterday — _ 3.REM Corp. 4. Low price forthe day_|_ © raded for the day 2, ‘The board of directors of Melody Technology, Inc, has declared a dividend of 2,800,000. The company has 600,000 shares of prefered stock that pay PI.40 per share and 1,000,000 shares of ommon stock. Calculate the amount of dividends due ‘the preferred shareholders andthe dividend per share of common stock. 5 HI 4. Swift Food, Ine. a EPS 'b. Closing price forthe previous day «. Value of stocks forthe day 5. Vitarch Corp. a EPS b. Volume waded forthe day ©. %echange from yesterday. 3. Birdee Laboratories has 300,000 shares of ‘100 par >, 7.5%, cumulative referred stock and 5,200,000 shares of common stock. igh Calculate the amount of dividends due the preferred shareholders and the divider per share of common stock ; ¥ on4 Powerf Corporation has 500. ‘of P425,000 was declared by the compar per share of common stock? Bananas Corporation hes 1800000 shi naa nares of c« preferced stock and 9,750,000 sh declared for the past two years. @ year. (a) How muct Share of common stock? Teletubs Financial has 500,000 shares of P100 3,000 shares of common stock, stock and for the past three years, a Pl How much is due the preferred shareholders? (b) Whi ‘common stock? due the pre (00 shares of common stock oF ny directors Hast 6 wares of P100 par value, 5%, cumulative ‘ommon stock. Although no dividend was 44,000,000 dividend has been declared for this ferred shareholders? (b) What is the dividend per year. (a) he dividend per share of company Earnings Per Share nas Bas He Word Problems ‘The Tiger Corporation paid closing price was P6438, wh Industries is curren earnings per share of P33. for Elm? oe PROFESSOR: ~ Cure Price Yes Earns idend of P3.40 per share last year. IF yesterday's current yield on the stock? for P186.88 per share. If the company had past 12 months, what is the price-earnings ratiofee jj proFeSSOR: ‘secon IP a a 1. Score: "PROFESSOR — Proceeds, and Gain (or Loss) Assume thatthe Bes 1% ‘What are the proceeds on ‘of the purchase’ ‘the gain or loss on the transaction? ares of Chem Merchandise common stock at P37.13 per shar. Sold the shares at P29.63, Your stockbroker charges 1% the total cost ofthe purchase? (b) What are the proceeds on Bain or loss on the transaction?——~y score PROFESSOR! (NAME: {SECTION Problem #6 BONDS Finding the Annual Interest and Cur Coun sat Maket——_ Cent rcs i Yeeld — — Name of the fund a — Net asst value pe Shas __ — Price paid for last share the previous uading resis aig dy Word Problem Year-to-date percemage reum Sey —_ Catculate the curet yied foe and curently Selling a a disso Nr YD. FUND nav GG SoRET Premium Bond Fund 2409 a2 907 Name ofthe fund [Net asset value pet share Price paid for last share the previous trading day ‘Year-to-date percentage retum 9.22NAME: SECTION: Problem #8 MUTUAL FUNDS Finding the Return on Invest 1. NAV = 717.60 on Jan, 1; NAV = P720 on Dee. 31; dividend distributions = P31 2, NAV = P408 on Jan. 1; NAV = P400 on Dec. 31; dividend distributions = P17.80 3. Peso Bond Fund's net asset value on January | was P160. During the year, the fund distributed P20 per share to investors. At the end of the year, the net asset value was P162. Calculate the return on investment. 4. Short-term Fund's net asset value on January 1 was P315. During the year, the fund distributed P60 per share to investors. At the end of the year, the net asset value was 320. Calculate the return on investment. 9-24