Q2 W 5

Gen Math
Different markets
for stocks and
bonds
Introduction of the Topic
I. Illustrate Stocks and Bonds.
● STOCKS
Some corporations may raise money for their expansion by
issuing stocks, stocks are shares in the ownership of the
company. Owners of stocks may be considered as part owners of
the company. There are two types of stocks:
1.Common stocks -represents the most common type of stock
issues by companies and entitles shareholders to participate in
the profit and growth of the company they invest in. When
looking at investing in the stock market for the most part you
are buying common shares in a company . Common stock has
the additional benefit of enabling its holders to vote on company
issues and when choosing the company’s leadership . Usually ,
one share of common stock equals one vote.
2. Preferred stocks.
-doesn’t offer the same profit potential as common
stock, but it’s a more stable investment vehicle
because it guarantees a regular dividend
that isn’t directly tied to the market as with the price
of common stock. Preferred stock guarantees
dividends , which common stock does not. The price
of preferred stock is tied to interest rate levels; it
tends to decrease if interest rates go up and increase
if interest rates fall. Preferred stock is further divided
into non-participating and participating stock
Non-participating -typically receives an amount
equal to the initial investment plus accrued and
unpaid dividends upon a liquidation event. Holders
of common stock then receive more per share than
holders of preferred stock upon a sale or
liquidation(typically where the company is being
sold at a high valuation), then holders of preferred
stock should convert their states into common stock
and give up their preference in exchange for the right
to share pro rata in the total liquidation proceeds
Participating preferred also typically receives an
amount equal to the initial investment plus accrued
and unpaid dividends upon a liquidation event.
However, participating preferred then participates o
n an ―as converted to common stock‖ basis with the
common stock in the distribution of the remaining
assets. Both will receive dividends or share of
earnings of the company. Dividends are paid first to
preferred shareholders.
● BONDS
Bonds are interest bearing security which promises
to pay amount of money on a certain maturity date as
stated in the bond certificate. Unlike the stockholders
, bondholders are lenders to the institutions which
any be a government or
private company. Some bond issuers are the national
government ,government agencies ,
government owned and controlled corporations, non-
bank corporations, banks and multilateral
agencies
Types of Bonds
There are four types of bond namely: 1. government bond, 2.
municipal bond, 3. corporate bond and 3. zero coupon bond.
1. GOVERNMENT BONDS:
Bondholders of government bonds are loaning money to a
government.
2. MUNICIPAL BONDS
The word ―municipal relates to smaller local government .
like those which govern towns, countries, cities, or states—
i.e . not national/federal governments. Just as investor can
loan money to federal governments, so , too, can they loan
money to local governments, usually to help fund specific
public projects, like water/sewerage upgrades, hospitals,
schools, etc.
3. CORPORATE BONDS
As the name suggests , corporate bonds are where
investors loan money to corporations. They make for
riskier investments than government and municipal
bonds, but the potential returns are much higher.
4. ZERO – COUPON BONDS
These bonds are often sold at a discount and have a
fixed interest rate that only pays out upon bond
maturity. In other words, there are no periodic
interest payments from these bonds; instead , the
interest accrues , or builds up , over time.
There are four basic concepts that will help to understand
bonds:
Par Value- also known as a face or principal value, is how
much the bondholders will receive at maturity. A Php
100,000 value bond will be worth Php 100,000 when it
matures.
Coupon- is the interest rate the bond pays. It is called the
coupon rate because once came with a book or coupons,
which the holder had to clip and send in to receive an
interest payment. Bond investors are still preferred to
sometimes as ―coupon clippers‖. This interest rate does
not vary over the life of the bond, although there are some
bonds, which have a variable interest rate tied to an
external index
Maturity - refers to the length of time before the par value
is returned to the bondholder. It may be as a few months,
50 years, or more. At maturity, the bondholder receives the
par value of the bond.
Yield-is the term you will hear the most about bonds their
yield and it can be the most confusing . There are three
different types of yield to explain. Nominal yield, current
yield and yield to maturity.
● 1. Nominal Yield- is the coupon or interest rate. Nothing
else is factored to this number. It is actually not very
helpful.
● 2. Current Yield- considers the current market price of
the bond, which may be different from the par value and
gives you a different return on that basis.
● 3. Yield to Maturity- is the most complicated , but
the most useful calculation. It considers the current
market price, the coupon rate, the time to maturity
and assumes that interest payments are reinvested at
the bond’s coupon rate. It is very
complicate calculation best done with a computer
program or programmable business calculator.
However, when the media talks about a bond’s
―yield it is usually this number they are talking
about
3. Distinguish between stocks and bonds.
Stocks
A form of equity financing or raising money by allowing
investors to be a part owners of the company
Bonds
A form of debt financing , or raising money by borrowing
from investors.
Stocks
Stock prices vary every day. These prices are reported in
various media (such as newspaper , TV , internet etc.)
Bonds
Investors are guaranteed interest payments and a return of
their money at the maturity date
Stocks
Investing in stock involves some uncertainty.
Investors can earn if the stock prices increase, but
they can lose money if the stock prices decrease or
worse, if the company goes bankrupt.
Bonds
Uncertainty comes from the ability of the bond
issuer to pay the bondholders. Bonds issued by the
government pose less risk than those by companies
because the government has guaranteed funding
(taxes) from which it can pay its loans
Stocks
Higher risk but with possibility of higher returns.
Bonds
Lower risk but lower yield.
Stocks
Can be appropriate if the investment is for long term (10
years or more). This can allow investors to wait for stock
prices to increase if ever they go low.
Bonds
Can be appropriate for retirees (because of the
guaranteed fixed income) or for those who need the
money soon(because they cannot afford to take a chance at
the stock market).
Comparison and contrast about bonds and stock
1.Type : Sale
Bond : Debt
Stock ;Equity
2. Type : Meaning
Bond : A bond is a debt security , in which the
authorized issuer owes the holders a debt and is
obliged to repay the principal and interest.
Stock ; Stock capital raised by a corporation
or joint-stock company through the issuance and
distribution of shares.
3.Type : Centralization
Bond : Bonds markets. Unlike stock or share
markets, often do not have a centralized exchange or
trading system.
Stock ; Stock or share markets, have centralized
exchange or trading system.
4. Type : Holders
Bond : Bond holders are in essence lenders to the
issuer. Owner is a creditor to the issuer.
Stock ; The stock holders own a part of the issuing
company. Owner obtains stake in the issuer.
5. Type : Return of Principal
Bond : Return of principal is promised
Stock ; Principal is at full risk.
6. Type : Legal Rights
Bond : More legal rights for non payment.
Stock ; Securities
7.Type : Participants
Bond : -High priority for repayment in case of issuer
bankruptcy. -Price fluctuate over time but face value
remains stable. -No voting rights
Stock ; -Low for repayment in case of issuer
bankruptcy.-Price fluctuate over time .
8.Type : Risk
Bond : High priority for repayment in case of issuer
bankruptcy. -Price fluctuate over time but face value
remains stable. -No voting rights
Stock ; -Low for repayment in case of
issuer bankruptcy. -Price fluctuate over time .
-Usually has voting rights
9.Type : Issued By
Bond : Bonds are issued by government , credit
institutions, companies and supranational institutions.
Stock ; Stocks for repayment are issued by
corporation or joint stock companies
10. Type : Owners
Bond : Bondholders
Stock ; Stockholders/shareholders

4. Definition of terms in relation to stocks

● Stocks- share in the ownership of a company
● Dividend- share in the company’s profit
● Dividend Per Share- ratio of the dividends to the
number of shares
● Stock Market- markets place where stocks can be
bought or sold. The stock market in the Philippines is
governed by the Philippine Stock Exchange(PSE)
● Market Value- the current price of a stock at which
it can be sold
● Stock Yield Ratio- ratio of the annual dividend per
share and the market value per share.
Also called current stock yield.
● Par Value- The per share amount as stated on the
company certificate. Unlike market value, it is
determined by the company and remains stable over
time.
EXAMPLE 1:
A certain financial institution declared a P 30,000,000 dividend for the
common stocks.
If there are a total of P700,000 shares of common stock, how much is the
dividend per share?
Solutions:
Total Dividend = 30,000,000 Given:
Total shares = 700,000 Given:
What is Dividend per share Asking:
Dividend per Share =Total Dividend Formula:
Total Shares
= 30,000,000 Substitute the given to the formula:
700,000
= P42. 86
Answer:
Therefore, the dividend per share is P42. 86
EXAMPLE 2:
A certain corporation declared a 3% dividend on a
stock with a par value of P 500. Mrs. Reyes owns
200 shares of stock with a par value of P500. How
much is the dividend she received?
Solution:
Dividend Percentage = 3 % Given:
Par Value = 500 Given:
Number of Shares (Mrs. Reyes) = 200 Given:
What is the Dividend Mrs. Reyes will received ?

Asking
Dividend = Dividend Percentage X Par Value X
Numberof Shares Formula:
= 0. 03(500)(200) Substitute the given:
= P3,000
Thus, the dividend is P3,000.
EXAMPLE 3:
Corporation A , with a current market value of P52,
gave a dividend of P8 per share for its common stock
Corporation B with a current value of P95, gave a
dividend of P12 per share. Use the stock yield ratio
to measure how much dividends shareholders are
getting in relation to the amount invested.
SOLUTION:
Corporation A:
Dividend per share =P 8 Given:
Market value= P52 Given:
What is the Stock Yield Ratio? Asking:
Stock Yield Ratio = Dividend per Share Formula:
Market Value
=8 Substitute the given to the formula:
52
= 0. 1538 Multiply by 100
= 15. 38% Convert to Percent
Corporation B:
Dividend per share =P 12 Given:
Market value= P95 Given:
What is the Stock Yield Ratio? Asking:
Stock Yield Ratio = Dividend per Share Formula:
Market Value
= 12 Substitute the given to the formula:
95
= 0. 1263 Multiply by 100
= 12. 63% Convert to Percent
Thus, Corporation A has a higher stock yield ratio than Corporation B.
But each peso would earn you
more if you invest in Corporation A than in Corporation B. If all other
things are equal, then it is wiser to invest in Corporation A
4. Definition of terms in relation to bonds.
● Bond- interest –bearing security which promises to pay
(1) A stated amount of money on the maturity date,and
(2) Regular interest payments called Coupons
● Coupon- periodic interest payment that the bondholder receives
during the time between purchase date and maturity date, usually semi-
annually
● Coupon Rate- the rate per coupon payment, denoted by r
● Price of a Bond- the price of the bond at purchase time, denoted by P
● Par Value or Face Value- the amount payable on the maturity date ,
denoted by F
If P = F , the bond is purchased at par.
If P < F, the bond is purchased at a discount
If P > F , the bond is purchased at premium.
● Term (or Tenor) of a Bond- fixed period of time (in
years) at which the bond is redeemable as
stated in the bond certificate; number of years from
time of purchase to maturity date
● Fair Price of a Bond-present value of all cash
inflows to the bondholder
EXAMPLE 5: Suppose that a bond has a face value of
100,000 and its maturity date is 10 years from now. The
coupon rate is 5% payable semi-annually. Find the fair
price of this bond, assuming that the annual market is 4%.
SOLUTION:
Face value F = 100,000 Given: Coupon
rate r = 5% Given: Time to
Maturity = n = 10 years Given: Number of
Periods = 2(10) = 20 Given: Market Rate = j =
4% Given: What is the Fair Price of
the Bond? Asking: Amount of semi-annual coupon
= Face Value x Coupon rate/ 2
Formula:
=100,000 ( 0.05 / 2 ) Substitute the
given to the formula
= 2,500
But, the bondholder receives 20 payments of 2,500
and 100,000 at t = 10
Present value of 100,000

Formula
= 100,000 Substitute the given to

(1 + 0.04 ) ^ 10
P = 67,556.42
But the present value of = 100,000
Convert 4% to equivalent semi-annual rate:
Stock Market Index
Is a measure of a portion of the stock market. One
example is the PSE Composite Index or PSEi. It
is composed of 30 companies carefully selected to
represent the general movement of market prices. The
up and down movement in percent over time can
indicate how the index is performing. Other indices
are sector indices, each representing a particular
sector. The stock index can be a standard by which
investors can compare the performance of their stocks.
A financial institution may want to compare its
performance with those of others. This can be done by
comparing with the ― financial index.
Market Stock Tables
Stock indices are reported in the business section of
magazines , or newspapers as well as online.
The following table shows a list of index values is
typically presented
In the table above, the term mean the following:
● Val- value of the index
● Chg- change of the index value from the previous
trading day
● %Chg- ratio of Chg to Val
EXAMPLE 4: Determine the amount of the semi-
annual coupon for a bond with a face value of
P300,000 that pays 10% , payable semi-annually for
its coupon.
SOLUTION:
Face Value F = 300.000 Given:
Coupon Rate r = 10% Given:
What is the amount of semi-annually Coupon

Asking:
Annual Coupon Amount = Face Value x Coupon rate
Formula:
=300,000 x (0.10) Substitute the given to

the formula
= 30,000 (annually)
But the problem is asking for semi-annually:
Therefore :
Semi-annually coupon amount = 30,000(1/2 )
= P15,000