MATHEMATICS INVESTMENT STOCKS, BONDS AND MUTUAL FUNDSFinancial risk is the chance you take of either making or losing money on an investment. In most cases, the greater the risk, the more money you stand to gain or lose. Investment opportunities range from low-risk conservative investments, such as government bonds or certificates of deposit, to high-risk speculative investments, such as stocks. Selecting the right investment depends on personal circumstances as well as general market conditions. Investments are based on liquidity, which indicates how easy it is to get your money out; safety, how much risk is involved; and return, how much you can expect to earn. Investment advice is available from stockbrokers, financial planners, and many other sources. It is generally agreed that over the long run, a diversified portfolio, with a mixture of stocks, bonds, cash equivalents, and sometimes, other types of investments, is a sensible choice. Determining the correct portfolio mix is a decision that should be based on the amount of assets available, the age of the investor, and the amount of risk desired. In this chapter, three forms of investment—stocks, bonds, and mutual funds will be discussed.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 to receive income in the form of dividends. Each ownership portion, or share, is represented by a stock certificate. Stock quotation tables found in the business section of most newspapers provide investors with a daily summary of what happened in the stock market during the previous trading day. A portion of a typical stock quotation table from the Philippine Stock Exchange is shown for illustration purposes. The listing reflects what transpired during a specific trading day. As can be seen, stocks are classified according to the type of business (i.e. banks, and food, beverage, and tobacco) to which they belong and are listed alphabetically.ae < a @ fe ga anes ae 7 & 7 > 52 Weeks rey. oe Nich Low STOCKS EPS CLOSE OPEN HIGH LOW CLOSE VOLUME —-VALUE_-—«=«CHANGE RATIO. BANKS 7050 4600 BDOLEASING 39100 6200 6200 6220 6180 62.00 3.450540 213457455 000 1586 740 5000 BANKOFTHEPHILISLANDS 3.6100 7630 7620 7620 7580 7610 690,780 52553103 (025) 2108) 595.00 370.00 CHIN BANKING CORP. 424600 47120 47120 47120 47120 47120 4980 «= 2.346578. 0.00 11:10, 20.70 1850 _EASTWEST BANK 37800 1940 1940 1950 1926 1950 292500 5674725 052516 10020 60.00 METROBANK 50200 94859465 9465 9300 9230 3686750 2a4ei9002 (163) 1859, 7780 4100. PHIL. NATLBANK 58300 7330 7330 7330 7250 73:15 186,700 © 10669,271 (0.20) 1255 4550 2675 RIZAL BANK 44300 445044004405 4355 a0 377,500 15610800 (2.12) 9.983 15520 77.00 secuRmTY sank 33.3400 146.00 14600. 14740 146.00 147.00 502420 73753310 0.68 11.02 140.00 58.00 UNION aanK 430.2809 101.00 10140 10140 10100 20100 25550 2,880,717 «a. 9.2 FOOD, BEVERAGE & TOBACCO 1358 800 AGRINURTURE goo 853855855 as] 51 47,700 406.218 (023) 1051 2395 1198 ALASKAMILK CORP, 1252 2000 2002000 2000 2000 100 2000» 000s 98 1.70 097 ALLIANCESELECTFOODS (00130) 140144148 1.42 146 1480000 2,085,420 © 4.29 (212.31) 3000 19.80 GINEBRASANMMIGUEL (35600) 2100 2050 2050 2080 20s0 19.300 «21150 (238) (578) 320.00 80.00 IOLLREEFOOOSCORP. «3.1380 101.00 10160 10160 9990 10000 281,720 28,7664 (099) 31.87 350 1.96 PEPSLCOLA 0.0800 340347 3523.45 «350 7,087,000 26,748070 2.98 8.75 403101 _geMconPonaTion 0.1610 399400409395 403 S.018000 20,027,750 100 25.03 3420 27,70 SANMIGUELEREWERY 0.7800 34.10 34.20 3420 3420 3420 «90,200 3058840 © zo (43.85. 18260 11020 SAN MIGUEL CORP. 49700 11300 11300 11300 11170 142.10 «131,900 14,795237(080)(22.56 0.25 0412 SWIFT FOOD, INC (0.0300) 0135 014 © 0.140.139 039360000 © Soasd 221.) 4298 3300 TANDUAY HOLDINGS: 0.3000 119011861250 tis 22.36 4637.60 56426758 3.874120 2658 12500 TARLAC 54800 500 1302 «1302 1288 «12.98 ©" 19000-47004 © (1347) 2.37 68.20 37.00 UNIVERSAL ROBINA 22500 3980 5950 60.75. $885 6060 173480 70870290 «147593 350 1.05 VICTORIAS MILUNG 0200 140 «140145. .g8 03,027,000 4.235110 0.00836 0.77 032 _virasicH cone. (5700) __063 064 069 064 0.68 10,3100 7137360 159 (2.2)Each column entry in the stock quotation is explained below. a, & b. 52 Weeks High and Low. The highest and lowest traded prices of a stock for the past 52 weeks. Name. The name of the listed company. EPS (earnings per share). Calculated by dividing after-tax income by number of, shares outstanding, Higher earnings result in higher stock value. Prev Close (previous close). The closing price of the previous trading day. Open. The opening price of the stock for the day. High. The highest traded price of a stock during a specific trading period. Low. The lowest traded price of a stock during a specific trading period. Close. The closing price of the trading day. Volume. The total number of shares traded during a given period. Value. The amount of transactions in pesos traded for a period. It indicates how much money is turned over from the trading of a particular stock. 1. % Change (percent change). Calculated as (i —¢//e. A negative value indicates that the closing price for the day is lower than that for the previous day. m. PE ratio (price earnings ratio). Calculated as i/d. It indicates how much an investor pays for a company’s earning power. An ‘above 20° PE ratio reflects. investor optimism as to higher future earnings of the company. ao Fre me Illustration: From the stock quotation table on the previous page, explain the information listed for Bank of the Philippine Islands (BPI) and Universal Robina. BPI js listed second under the Banks classification. On that specific day, the corporation’s stock opened at P76.20. The high for the day was P76.20 while the low, P75.00. The stock closed at P76.10. 690,780 shares of stock were traced during the day. On the same day, Universal Robina stock’s (second line under Food, Beverage and Tobacco classification) open price was P59.90. The day’s high was P60.75 and low P58.85. It finally closed at P60.60. 1,173,480 shares were traded throughout the day.Scripless Trading The Philippine Central Depository, Inc. established in March 1995, provides the securities settlement system for both debt and equity instruments of the Philippine Stock Exchange (PSE). Its computerized book-entry-settlement system paved the way for a safe and efficient scripless trading. Scripless trading is the 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 for a certificate from their broker. Dividends on Preferred and Common Stock Generally, if the company does well, the investor or shareholder will receive dividends, which are distributions of the company's profits. If the share price goes up, the stockholder can sell the stock at a profit.Many companies offer-two classes of stock to appeal to different types of investors. These classes are known as common and preferred. With common stock, an investor shares directly in the success or failure of the business. When the company does well, the dividends and price of the stock may rise, and the investors make money. When the company does poorly, it does not pay dividends and the price of the stock may fall. With preferred stock, the dividends are fixed, regardless of how the company is doing. When the board of directors of a company declare a dividend, the preferred stockholders are paid before the common. If the company goes out of business, the preferred stockholders have priority over the common stockholders as far as possibly getting back some of their investment. Preferred stock is issued either with or without a par value. When the stock has a par value, the dividend is specified as a percent of par. For example, each share of 8%, P100 par value preferred stock pays a dividend of P8.00 per share (P100 * .08) per year. When preferred stock has no par value, the dividend is stated as a peso amount. Note, however, that Section 6 of the Corporation Code of the Philippines states that preferred shares of stock may be issued only as par value shares.Cumulative preferred stock receives dividends each year. When no dividends are paid one year, the amount owed, known as dividends in arrears, accumulates. Common stockholders cannot receive any dividends until all the dividends in arrears have been paid to cumulative preferred stockholders. Preferred stock is further divided into categories known as non-participating, which means the stockholders receive only the fixed dividend and no more; and participating, which means the stockholders may receive additional dividends if the company does well. Convertible preferred means the stock may be exchanged for a specified number of common shares in the future. Cash and/or property dividends received by a resident citizen-stockholder from a domestic corporation is subject to 10% final tax effective year 2000. The amount the stockholder will receive shall be net of the 10% final tax.The steps to distribute dividends on preferred and common stock follow: If the preferred stock is cumulative, any dividends that are in arrears are paid first; then the preferred dividend is paid for the current period. When the dividend per share is stated in pesos (no-par stock), go to Step 2. When the dividend per share is stated as a percent (par stock), multiply the par value by the dividend rate. Dividend per share (preferred) = Par value « Dividend rate Calculate the total amount of the preferred stock dividend by multiplying the number of preferred shares by the dividend per share. Total preferred dividend = Number of shares x Dividend per share Calculate the total common stock dividend by subtracting the total preferred stock dividend from the total dividend declared. Total common dividend = Total dividend — Total preferred dividend Calculate the dividends per share for common stock by dividing the total common stock dividend by the number of shares of common stock. Total common dividend Dive per share enninan) =) reeMlustration: Kash Corporation has 2,500,000 shares of common stock outstanding, Ifa dividend of P4,000,000 was declared by the company directors last year, what are the dividends per share of common stock? Since Kash has no preferred stock, the common shareholders will receive the entire dividend. Go directly to Step 4. e Total c dividens 4,000,000 Dividend per share (common) = ee = Om aM = P1.60 per shi Illustration: The board of directors of Sabell Developers, Inc. declared a dividend of P300,000. The company has 60,000 shares of preferred stock that pay P0.50 per share and 100,000 shares of common stock. Calculate the amount of dividends due the preferred shareholders and the dividend per share of common stock. 1. Since the preferred dividend is stated in pesos (P0.50 per share), the first step is dispensed with. Proceed to step 2. 2. Total preferred dividend = Number of shares » Dividend per share Total preferred dividend = 60,000 * .50 = P30,000 3. Total common dividend = Total dividend — Total preferred dividend Total common dividend = 300,000 ~ 30,000 = P270,000 L 4. Dividend per share (common) = ‘Total common dividend No. of shares (common)Illustration: Mog Company has 100,000 shares of P100 par value, 6%, cumulative preferred stock and 2,500,000 shares of common stock. Although no diyidend was declared last year, a P5,000,000 dividend has been declared this year. Calculate the amount of dividends: due the preferred shareholders and the dividend per share of common stock, 1, Because the preferred stock is cumulative, and the company did not pay dividends last year, the preferred shareholders are entitled to the dividends in arrears and the dividends for the current period. Dividend per share (preferred) = Par value = Dividend rate Dividend per share (preferred) = 100 x .06 = P6.00 per share of 20, or 20:1, means that buyers are willing to pay 20 times the current earnings for a share of stock. The price-earnings ratio of a stock is most useful when compared with the P/E ratios of the company in previous years and with the ratios of other companies in the same industry.The price-earnings ratio of a stock is computed as follows: 1. Divide the current price of the stock by the earnings per.share for the past 12 months: . i 7 Current price per share Price-earnings ratio = Earnings per share -2. Round answer to the nearest whole number (may be written as a ratio, x:1). Illustration: Alix stock is currently selling at P104.75. If the company had earnings per share of P3.60 last year, calculate the price-earnings ratio of the stock. . f «) . _Current price per share Price-earnings ratio = ——WEEBE price pet Share — Earnings per share Price earnings rato “ue = 29.0972 = 29 or 29:1 The ratio shows that investors are currently willing to pay 29 times the earnings for | share of Alix stock.Cost, Proceeds and Gain (or Loss) on a Stock Transaction Investors take on the risks of purchasing stocks in the hope of making money. Although they are more risky than many other types of investment, over the years stocks have shown they are capable of generating spectacular returns in some periods and steady returns in the long run. One investment strategy is to buy stocks and keep them for the 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. The cost! of purchasing stock includes not only the purchase price but also brokerage commission. Brokerage commission rates are competitive, and vary from broker to broker. Nowadays, commission rates range from 0.25% to 1.5%. On the other hand, the proceeds? from selling stock include the selling price less brokerage commission. The proceeds from sale less the cost of purchasing stock is the gain or loss. ' Also includes Philippine Central Depository (PCD) Fee, Securities Clearing Corporation of the Philippines (SCCP) Fee, Transfer Fee, plus related Value-Added Tax (VAT), Documentary Stamps Tax (DST) and all other costs incurred in the acquisition of securities. ® Also to be deducted from selling price are Philippine Central Depository (PCD) Fees, Securities Clearing Corporation of the Philippines (SCCP) Fee, Cancellation Fee, plus related VAT, Stock Transaction Tax (1/2 of 1% of value of transaction in lieu of Capital Gains Tax) and all other costs incurred in the sale of securities,Return on Investment The return on investment (ROT) measures the total monetary gain on a stock for an investor. It is found by adding the amount that a stock has gone up in value during one year (net gain), assuming it was sold at the end of one year, to the total dividends paid to the investor, minus, of course, any commissions and other fees. Ror = —Netgain + Total dividends Total cost of stock purchase Illustration: Using the data in the previous illustration and assuming that a total of P1,300 in dividends was received for the year, Ben’s ROI is calculated as follows: s (12,805 — 10,150) + 1,300 Rl 10,150 = 0.3897 or 38.97% Ben’s ROI at 38.97% is a very good return.BONDS A bond is a formal unconditional promise made under seal to pay a specified sum of money at a determinable future date, and to make periodic interest payments at a stated rate until the principal sum is paid. It is a contract of debt whereby one party called the borrows fund from another party called the investor. A bond is evidenced by a The contractual agreement between the issuer and investor is contained in another document known as bond indenture. The basic difference between stock and bond is that with stock, the investor becomes a part owner of the corporation; while with bonds, the investor becomes a creditor. Bonds are known as fixed-income securities because the issuer promises to pay a specified amount of interest regularly. Interest from bonds received by a resident citizen-investor is generally taxed at 20% final tax. The amount the investor will receive shall be net of the 20% final tax.When bonds are issued by a corporation, they may be purchased by investors at face value, and held until the maturity date; or they may be bought and sold through authorized brokers and banks. Generally, bonds are issued in small denominations such as P100, P1,000 or P10,000 to enable more investors to purcha For instance, a P50,000,01 issue may be issued in denomination of P1,000. ;, there shall be 50,000 bonds with face of P1,000 each: If the quoted price in the market pertains to bonds, it means percent of the face value of the bonds, For instance, if the investment in P2,000,000 face value bonds of FH Company, costing P1,700,000, is quoted at 90, the market value thereof is P1,800,000, computed by multiplying the face of P2,000,000 by 90%. Bonds pay a fixed interest rate, also known as the coupon rate. This rate is a fixed percentage of the face value that will be paid to the bondholder on a regular basis usually semi-annually such as January | and July 1, or February | and August 1, or March | and September 1, and so on. During the period between the issue date and the maturity date, bond prices fluctuate in the opposite direction of prevailing interest rates. Assuming you buy a bond with a coupon rate of 8%. If interest rates in the 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 at a premium.On the other hand, if interest rates rise to 9%, new bonds would have a higher rate than yours, thus making yours less attractive and pushing the price down, below face. If bonds sell below face, it is known as selling at a discount. At maturity, the bond returns to its face value. For example, a company might issue a P1,000 face value, 7% bond, maturing in the year 2025. The bondholder in this case would receive a fixed interest payment of P70 per year (P1,000 x .07), or P35 semi-annually, until the bond matures. This is regardless of whether the bond was bought at a discount, at face value or at a premium. At maturity, the company repays the loan by paying the bondholder the face value of the bond. There are different types of bonds. Secured bonds are backed by a lien on a plant, equipment, or other corporate asset. Unsecured bonds, also known as debentures, are backed only by the general credit of the issuing corporation. Some bonds are convertible, which means they can be converted into, or exchanged for, a specified number of shares of common stock. Callable bonds give the issuer the right to call or redeem the bonds before the maturity date. Calling bonds might occur when interest rates are falling and the company can issue new bonds at a lower rate. Serial bonds are those which have a series of maturity dates or those bonds which are payable in installments. Bonds with a single maturity date are called term bonds.Cost, Proceeds and Gain (or Loss) on a Bond Transaction The cost of bonds includes the purchase price (current market price plus accrued interest), broker’s commission, taxes and other charges incurred in their acquisition. As noted earlier, bonds pay interest semi-annually, such as on January I and July 1. When bonds are traded between the stated interest payment dates, the buyer must pay the interest accumulated from the last payment date to the seller. This interest due the seller is known as the accrued interest. The accrued interest on the bond is calculated using the formula J= PRT where P is the face value of the bond, & is the coupon rate, and Tis the number of days since the last payment date divided by 360. When time is stated in months, the time denominator is 12. Similar to stocks, when bonds are bought and sold a brokerage charge is normally added to the price of the bond. Taxes (i.e. documentary stamp tax) and other charges related to the acquisition of the bond form part 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) from a bond transaction is the difference between the proceeds from the sale and the cost of purchase. From the accounting viewpoint, the difference between sales proceeds and the purchase price of the bond is not all gain but is a combination of interest income and gain on sale. Gains realized from sale of bonds with a maturity of more than five (5) years shall be excluded from gross income and consequently exempt from income tax.Current Yield for a Bond Just as with stocks, the current yield of a bond is a simple measure of the return on investment based on the current market price. When bonds are purchased at face, the current yield is equal to the coupon rate. For example, a bond purchased at face for P1,000, with a coupon rate of 7%, pays interest of P70 per year (P1,000 « .07), and has a yield of 7% (70/100 = .07). If the bond is purchased at a discount, say P875, it still pays P70; however, the yield is 8% (70/875 = .08). If the bond is purchased at a premium, say P1,165, it still pays P70; however, now the yield is only 6% (70/1165 = .06) Calculating the current yield for a bond entails the following steps: 1. Calculate the annual interest and current price of the bond. 2. Divide the annual interest of the bond by the current market price: ve Annual interest Current yield = —2RUS Interest Current market price 3. Convert the answer to a percent, rounded to the nearest tenth.MUTUAL FUNDS Mario Francisco wants to invest some money in the stock market, but does not want to spend a lot of time following the stock market and studying which stocks are good investments. Consequently, he decides to purchase mutual funds. A mutual fund is a fund managed by an investment company. Depending on the type of fund, the investment company buys stocks, bonds, and other investments on behalf of the fund. The money in the fund may come from individuals and institutions. When you invest money in the fund, you receive shares. As an investor, you are an owner of the fund. The investment company acts as your advisor, buying and selling stocks or bonds it feels are good investments. Some mutual funds do not have a fixed number of shares but issues new shares as it takes in money and redeems them as investors withdraw. Some funds, however, after reaching a certain size, will stop accepting new investors and will not issue any new shares. There are different types of mutual funds, some having high growth potential but high risk and others having lower growth potential but less risk.A load mutual fund charges you a fee when you buy or sell (redeem) shares; a no-load mutual fund does not charge investors this fee. The load may range between 0.25 to 3% based on the amount invested. Some mutual funds charge early redemption fee at 1%. This is to discourage the investor from redeeming his shares earlier than the required minimum holding period. Management, advisory and distribution fees range between 0.75% to 2% per annum based on the net asset value of the fund. The price of a mutual fund share is calculated by dividing the fund's net assets (assets minus liabilities) by the number of shares outstanding. This price, or value, is called the net asset value (NAY). The net asset values are calculated at the end of each day using the closing price of each security in the portfolio. When you redeem your shares, the fund pays you cash based on the net value on that day. Cash and/or property dividends received by a resident citizen-stockholder from a mutual fund company is subject to 10% final tax effective year 2000. The amount the investor will receive shall be net of the 10% final tax. Gains derived by investors from redemption of shares of stock in a mutual fund are exempt from capital gains tax.Interpreting a Mutual Fund Quotation The following illustration shows a mutual fund quotation and its interpretation. Illustration: Equity Fund NET YID FUND NAV CHG eabl | Fixed Income Fund {79.47 008 ND Equity Fund 255.82 Balanced Fund 135.67 oo ae FUND. Equity Fund is the name of the fund. The Fund aims to achieve long-term capital growth, NAV. Today, P255.82 is the net asset value per share. NET CHG (net change). It is the difference between the price paid for the last share today and the price paid for the last share the previous trading day. The Equity Fund closed P0.03 higher than yesterday’s closing price. YTD % RET (year-to-date percentage return). The Fund has a 30.31% return since January 1.Return on Investment Aimee Bolivia invested in Growth Fund, a mutual fund. To determine whether she had made a wise choice, she wanted to calculate her return on investment. The return on investment for a mutual fund depends on the increase in net asset value and on the dividends paid from the fund. The following formula is used to calculate a mutual fund's return on investment: End-of-year NAV + Dividend dist Return on investment = uutions Beginning-year NAV Beginning-year NAV Illustration: Growth Fund's net asset value on January 1 was P100. During the year, the fund distributed P25 per share to investors. At the end of the year, the net asset value was P104. Calculate the return on investment. Return on investment = End-of-year NAV + Dividend distributions ~ Beginning-year NAV Beginning-year NAV 104 + 25-100 100 29 100 0.29 The return on investment is 29%.Thank you... and hope our sharing will give you enough insights to make your teaching — learning process more meaningful.