Bonds

Bond value
Maturity date
o 1he dute ln whlch !"#$%$&# ()*+$"#& &#,( und the !"!#!)-
+,"$* .&$/ #, !"0$&# !& ()!/ 1)23. Eowever, some flxed
lncome securltles ure "culluble', meunlng thut the lssuer of
the debt cun return rlnclul whenever.
Principal
o Money used to buy un lnvestment of bonds
Yield
!"#$% !!! !
!"#$%&
!"#$%& !"#$% !" !"#$%&'(


o lncome from lnterest or dlvldend of securlty
o Cost yleld (dlvldend)
! Murket vulue = vulue bought j lnvested
o Current yleld (dlvldend)
! Murket vulue = current murket vulue
o Couon yleld
! lnterest rute flxed when bought
o 1uxequlvulent (1L) yleld
! lor nontuxuble governmentul bonds
! Yleld uccordlng to lnvestor's tux brucket
o Mutuul fund yleld
! Comblnutlon of net lncome und dlvldend ln one yeur
Real rate of return
!"#$ !"#$ ! !"!#!"# !"#$ ! !"#$%&!'" !"#$

o Return from lnterest rute of bonds thut ls udjusted to uvold
lnflutlon j deflutlon
Types
Treasury bills/bonds/notes
o A murketuble, flxedlnterest 4565 7,0$%"+$"# /$1# &$2.%!#*
wlth u +)#.%!#* ,8 +,%$ #9)" :; *$)%&.
o lnterest uld every hulf yeur
o lncome recelved ls ufter federul level tux lncome
o lnltlul sell ln un uuctlon
! Cometltlve
1he buyer gets to burguln for the lnterest
rute but ls not ensured of gettlng the bond
! Noncometltlve
1he buyer ls ensured of the bond but hus to
uccet the governmentul lnterest rute
Junk bonds
o Cororute bonds thut huve u hlgh yleld und u hlgh defuult rlsk


Stocks

Ways of profiting from stock
Speculation
o 8uy low, sell hlgh
o Elgh rlsk
Capital gain/loss
o " #$%&'( )& *$( +%,-( ./ %00(*0 *$%* 1.(0 &.* 0$.2 -&,(00 *$(
%00(*0 %3( *3%1(14 5$( 3(%,)6(1 '%)& )0 *$( %/*(3 *%7 )&#.8(
/3.8 *$( *3%1)&' 1.&(4
o " 0(#-3)*9 2)*$)& % 8-*-%, /-&1 )&#3(%0(0 /3.8 )*0 :-3#$%0(
:3)#(4 5$( 3(%,)6(1 '%)& )0 *$( %/*(3 *%7 )&#.8( /3.8 *$(
0(,,)&' ./ *$( 0(#-3)*94
! ;(%,)6(1 '%)&
" '%)& <)&#3(%0( )& )&#.8(= 1-( *. *$(
0(,,)&' ./ %& %00(* %* % $)'$(3 :3)#( *$%& *$(
.3)')&%, :-3#$%0( :3)#(
>)0%1+%&*%'(? % '%)& )&#3(%0(0 *%7
Dividend
o @3./)* ./ % #.3:.3%*( *$%* )0 3(*-3&(1 *. *$( 0*.#A $.,1(30
o >)+)1(&10 :(3 0$%3(
o B%& C( )& *$( /.38 ./ 0*.#AD #%0$ .3 :3.:(3*9
o E*%C,( #.8:%&)(0 -0-%,,9 ')+( .-* 1)+)1(&1 *. #.8:(&0%*(
/.3 *$( 0,.2 '3.2*$ ./ 0*.#A
o F-*-%, /-&10 1)0*3)C-*( 1)+)1(&1 /3.8 *$( :.3*/.,). *. /-&1
$.,1(304 5$( 3(%,)6(1 '%)&0 )0 %,0. ./*(& 1)0*3)C-*(1 %0 9(%3
(&1 1)+)1(&1

Stock indexes <#.-&*39D 0)'&)/)#%&#(D $.2 8%&9 0*.#A0 *3%#A)&'=
Dow Jones Industrial Average
o A rlcewelghted uveruge of <; &!7"!8!2)"# &#,23& truded on
the =$> ?,%3 6#,23 @A29)"7$ )"/ #9$ =B6CBD.
o Cne of the oldest und slngle most wutched lndex ln the world
NASDAQ Average
o A murketcultullzutlon welghted lndex of )-- =)&/)E -!&#$/
&#,23& thut ure not derlvutlves, referred shures, funds,
exchungetruded funds (L1ls) or debentures.
Standard & Poors 500 Index
o A murket vulue welghted lndex of F;; &$-$2#$/ 2,+()"!$&
uccordlng to murket slze, llquldlty und lndustry groulng
o Reflects the rlskjreturn churucterlstlcs of the lurge cu
unlverse
! Rlskjreturn churucterlstlcs
1he chunce of u debt not uld buck
! Lurge cu
Lurge murket cultullzutlon
Comunles wlth murket cultullzutlon vulue
over sc bllllon
Murket cultullzutlon = exlstent comuny
shure ! stock rlce er shure
o 8etter deflnltlon of the U.S. stock murket thun L'lA us lt hus
cc comunles us oosed to only c.
Nikkei
o 1he leudlng und mostresected lndex of 'uunese stocks. lt
ls u rlcewelghted lndex comrlsed of G)()"H& #,( IIF 1-.$J
29!( 2,+()"!$& on the 1okyo Stock Lxchunge.
Hang Seng
o A murket cultullzutlonwelghted lndex of K; ,8 #9$ -)%7$&#
2,+()"!$& thut trude on the L,"7 M,"7 @A29)"7$.
CAC 40
o 1he lrench stock murket lndex thut trucks the K; -)%7$&#
N%$"29 &#,23& bused on murket cultullzutlon on the Purls
8ourse (stock exchunge).
FTSE 100
o An lndex of :;; 1-.$J29!( &#,23& on the O,"/," 6#,23
@A29)"7$.
! 8luechl stock
Stock of u lurge, wellestubllshed und
flnunclully sound comuny thut hus
oeruted for muny yeurs.
Usuully blg cus
DAX 30
o Cermuny's benchmurk stock murket lndex, lt ls u totul return
lndex of #9$ <; -)%7$&# P$%+)" 1-.$J29!( 2,+()"!$& truded
on the lrunkfurt Stock Lxchunge.

Ways of evaluating stocks
Book value per (common) share
!""# !"#$% ! !""#$" ! !"#$"!"%"&'

o 1he umount of money thut u holder of u common shure
would get lf u comuny wus to llquldute (go bunkrut und
forced to sell everythlng).
o Used to meusure the level of sufety ussocluted to euch
common shure (lf the shureholder would get money or not lf
the comuny does go bunkrut)

! Common shure
1he stock we buy
! Preferred equlty (stock, shure)
Stock j shure thut hus hlgher rlorlty thun
common shure
Recelves dlvldend before common
shureholders get thelrs.
! Shures outstundlng
1he totul stock of the comuny
! 1unglble common equlty
A meusure of u comuny's cultul
Used to evuluute u flnunclul lnstltutlon's
ublllty to deul wlth otentlul losses.
! Shureholder's equlty

lnltlul und ull other lnvestments
Retulned eurnlngs



Price earnings ratio (PE ratio)
!" !"#$% !
!"##$%& !"#$% !"# !"#$%
!"#$%$&' !"# !"#$%


o Lurnlngs er shure ls /!0!/$"/ 8,% 2,++," &9)%$&
o 4&$/ #, /$#$%+!"$ !8 #9$ &9)%$ !& ,0$%(%!2$/
! A lower PL rutlo ls usuully better
! A hlgh rutlo suggests hlgher oulurlty of the stock,
us lnvestors ure wllllng to uy more for euch eurnlng.
1hls ls llkely cuused by confldence ln lncreuse ln
eurnlng ln the future
o 1he rutlo ls only useful for 2,+()%!"7 2,+()"!$& or the ust
und resent of u comuny
o 1here ls often munlulutlon on the eurnlngs urt, thls ln turn
mukes PL rutlo undeenduble
o Q*2-!2)--* )/R.&#$/ S@: looks ut ten yeurs lnsteud of one
Return on equity (ROE)
!"#$%& !" !"#$%& !
!"# !"#$%&
!"#$%"&'%$(! !"#$%&


o 1he umount of roflt roduced uslng the money
shureholders lnvested.
o Shown u ercentuge
o Preferubly hlgh becuuse lt would reresent the comuny ls
efflclent und rofltuble
Debt to equity ratio
!"#$ !" !"#$%& !"#$% !
!"!#$ !"#$"!"%&'
!"#$%"&'(%$)! !"#$%&


o 1he umount of ussets flnunced by shureholder's equlty
o A hlgh rutlo meuns the comuny ls uslng u lot of debt to
flnunce lts growth



Fundamental analysis
o Lvuluutlon of u securlty by exumlnlng mucroeconomlc fuctors
und comuny seclflc fuctors (flnunclul condltlon und
munugement)
o Produces the !"#%!"&!2 0)-.$ of securlty thut enubles lnvestors
to comure wlth current rlce of securlty
Technical analysis
o Lvuluutlon of u securlty by unulyzlng &#)#!&#!2& generuted by
murket uctlvlty, such us ust rlces und volume.
o ldentlfles utterns thut suggest 8.#.%$ )2#!0!#*

Way of evaluating companies
Annual report
o Lescrltlon of oerutlons und flnunclul condltlons
! 8y cororutlons or mutuul funds
Balance sheet
o A flnunclul stutement thut summurlzes u comuny's ussets,
llubllltles und shureholders' equlty ut u seclflc olnt ln tlme.
o Assets = llubllltles Shureholders' equlty
! A comuny hus to uy for ull the thlngs lt hus
(ussets) by elther borrowlng money (llubllltles) or
gettlng lt from shureholders (shureholders' equlty).
Income statement
o A flnunclul stutement thut records the revenues und
exenses from both oerutlng und nonoerutlng uctlvltles.
Assets
o 1hlngs owned by u comuny (cultul)
Liabilities
o Lebt

Other investment instruments

Certificate of deposit (CD)
Suvlngs certlflcute
8eurs u muturlty dutu und u flxed lnterest rute

Money market fund
1ye of mutuul fund
Lowrlsklow return
Portfollo comrlsed of shortterm (les thun u yeur) securltles

Mutual fund
A collectlon of securltles thut ls structured und mulntulned to mutch
the lnvestment objectlves stuted ln lts rosectus.
Pools together money of smull lnvestors
Ceruted by money munugers
Creutes u dlverslty of equltles, bonds und other securltles for smull
lnvestors.

Investing concepts and guidelines

Risk
Risk-return tradeoff
o Potentlul return rlses wlth un lncreuse ln rlsk
! Elgh rlsk > hlgh otentlul return, vlce versu
Market risk
o Rlsk due to overull erformunce of the economy
! Lx. Recesslons, olltlcul turmoll, lnterest rutes
Inflation risk
o Uncertulnty over the future reul vulue (vulue udjusted for
lnflutlon) of lnvestment
Default risk
o Lenders not returnlng debt to borrowers (lnvestors of
bonds)
Interest rate risk
o Chunge ln lnvestment's vulue due to chunge ln lnterest rute
o Affects bonds more dlrectly thun stocks
Aggressive portfolios
o A ortfollo thut ulms to muxlmlze returns wlth securltles of u
hlgher rlsk
Conservative portfolios
o Alms to mulntuln the reul vulue of the ortfollo, or to rotect
the vulue of the ortfollo ugulnst lnflutlon

Long term advantages
Diversification
o Mlxlng u wlde vurlety of lnvestments wlthln u ortfollo to
lower rlsk
Compounding
o Productlon of lncome from revlous eurnlngs
Dollar-cost averaging
o 8uylng u flxed dollur umount of u urtlculur lnvestment on u
regulur schedule, regurdless of the shure rlce.