STOCKS AND BONDS
Comparison of Stocks and Bonds:
Stocks Bonds
A form of equity financing or A form of debt financing, or
raising money by allowing raising money by borrowing from
investors to be part owners of the investors
company.
Stock prices vary every day. These Investors are guaranteed interest
prices are reported in various payments and a return of their
media (newspaper, TV, internet, money at the maturity date
etc).
Investors can earn if the stock Investors still need to consider the
prices increase, but they can lose borrower’s credit rating. Bonds
money if the stock prices decrease issued by the government pose
or worse, if the company goes less risk than those by companies
bankrupt. because the government has
guaranteed funding (taxes) from
which it can pay its loans.
Higher risk but with possibility of Lower risk but lower yield.
higher returns
Can be appropriate if the Can be appropriate for retirees
investment is for the long term (10 (because of the guaranteed fixed
years or more). This can allow income) or for those who need the
investors to wait for stock prices to money soon (because they cannot
increase if ever they go low. afford to take a chance at the stock
market)
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 –a 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.
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 received semiannually
Coupon Rate –the rate per coupon
payment period; 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
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 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.
1. A certain financial institution declared
a P30,000,000 dividend for the common
stocks. If there are a total of 700,000
shares of common stock, how much is
the dividend per share?
2. A certain corporation declared a 3%
dividend on a stock with a par valueof
P500. Mrs Lingan owns 200 shares of
stock with a par value of P500. How
much is the dividend she received?
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 market
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.
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 coupons.
5. Suppose that a bond has a face value
of P100,000 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 rate is 4%.
Business and Consumer Loans
Definition of Terms:
Business Loan – money lent
specifically for a business purpose. It
may be used to start a business or to
have a business expansion
Consumer Loan –money lent to an
individual for personal or family purpose
Collateral – assets used to secure the
loan. It may be real-estate or other
investments
Term of the Loan – time to pay the
entire loan
Amortization Method – method of
paying a loan (principal and interest) on
installment basis, usually of equal
amounts at regular intervals
Mortgage – a loan, secured by a
collateral, that the borrower is obliged to
pay at specified terms.
Chattel Mortgage – a mortgage on a
movable property
Outstanding Balance – any remaining
debt at a specified time
