CHAPTER 12: INVESTING IN STOCKS AND BONDS. RISKS of Investing!. Business Financial Market Purchasing Power Interest Rate Liquidity Event. Returns from Investing. Current Return— income while you hold the security + Future Return or Capital Gain— gain on the sale of the investment
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Current Return—income while you hold the security
Future Return or Capital Gain— gain on the sale of the investment
= Total Return on the investment
Buy an 8%, $1,000 Treasury bond that matures in 20 years.
Scenario 1: Spend the income
0 5 10 15 20
Set on 1 P/YR
and END mode:
Scenario 2:Reinvest the income Use your calculator to find what you would end up with if you indeed earned an 8% compounded annual return:
Interest on interest
0 5 10 15 20
If you want
you will most likely have to accept
3-yr Treasury Notes
U.S. Treasury Bills
Earnings per Share— amount of net income earned by one share of common stock.
(Net profits after taxes
– Preferred stock dividends paid)
Number of shares outstanding
Price/Earnings Ratio— shows amount investors are willing to pay for $1 of earnings.
Market price of the stock
Annual earnings per share
Beta— indicator of a stock’s price volatility relative to the market.
Growth — issued by companies expected to have above average rates of growth in operations and earnings.
Tech — issued by companies in the technology sector.
Income — issued by companies which have a fairly stable stream of earnings.
Cyclical — issued by companies whose stock prices move in same direction as the business cycle.
Mid-Cap — issued by companies with market capitalization of $1–5 billion.
The par value is the amount of principal that must be repaid to the bondholder—usually $1000 on a corporate bond.
Below Investment Grade
.075 x $1000 = $75
$75 2 = $37.50
$37.50 + $1000 = $1,037.50
1.01 x $1000 = $1,010
INTEREST RATES AND BOND PRICES MOVE IN OPPOSITE DIRECTIONS!!!
Interest rates RISE and comparable new bonds are now issued at 9%.
Interest rates FALL and comparable new bonds are now issued at 7%.