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Module 4.1 Stocks and Bonds

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70 views19 pages

Module 4.1 Stocks and Bonds

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alpha.kenji919
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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Mathematics in

the modern
world
MODULE Mathematics
4 as a Tool
Handling Finances
Wisely
Basic Concepts of Stocks
and Bonds

Compiled by:

Ms. ROSYL MAY J. TIAÑA


1
MODULE
Basic Concepts of Stocks and Bonds
4
Time Frame: 3 hours

Learning Outcomes
At the end of this module you must have;
1. Illustrate stocks and bonds.
2. Distinguishes between stocks and bonds.
3. Describes the different markets for stocks and bonds.
4. Compute dividends, and stock yield ratio of a stock.
5. Determine earnings, growth rate, and future growth rate in buying and
selling stocks.
6. Evaluate the share cost, fair price, and future value of a bond security.
7. Appreciate the importance of being wise in investing money.

Overview
Invest while you are young.
Bo Sanchez said in one of his books: “Do you know the problem with the stock
market world? They don’t speak English. Honest. They speak in some strange dialect that
is spoken only in the second moon of the planet Uranus. But I’ve solved that problem. If
my kasambahay can understand me, then anyone can understand me. Today, my
helpers are investing in the stock market and they’re happy.” This module will help you
get a good idea of how the stock market works and understand the basics of stocks and
bond.

2
Activity
Solving Linear Equations in One Variable
In this module, you will need to refresh your memory and skills in solving a certain variable.
You will encounter certain algebraic equations where you will have to solve for the
variable x. You will also be required to transform sentences into mathematical equations.
As preliminary, solve the following problems.

A. Find the value of the variable which satisfy the following equations.
(Consider all letters are variable)
1. 3e + 4 = 10 e = _____
2. 2(3q – 8) = 20 q = _____
3. 0.3 (u – 100) = 60 u = _____
4. 2a + 0.15a = 10a a = _____
𝑡𝑡+4
5. � � =2 t = ______
3

6. 0.05 = 0.03i – 500 i = ______


𝑡𝑡+4
7. 2 � � +1=5 t = ______
3

8. 300 = 20 + 35% (n – 10) n = _____

B. Transform the following sentence into mathematical equation.


(Use variable x for the unknown)
1. The sum of a certain number and 100 is 300. _____________________________________
2. Twice a certain number plus 27 is equal to 37. ____________________________________
3. Thrice the sum of 4 and a certain number is 18. ___________________________________
4. Four times a certain number is the same as increasing it by 15. ____________________
5, When the sum of a certain number and 5 is doubled, the result is 14. _______________

3
Analysis
Based from the Activity
1. What method did you use in solving for the unknown variable? ____________________
_________________________________________________________________________________
Did you check your answer? If Yes, how? If no, why?
_________________________________________________________________________________
2. What was the challenge that you countered in transforming those sentences in
mathematical equation?

Abstraction

“Wealthy people invest first and spend what’s left and broke people spend first and invest
what’s left.” Anonymous
Stocks and bonds beat (by far) the interest rates that banks offer in any deposit
accounts. For instance, while banks offer 0.5% per annum, stocks generally earn 15% of
the principal. However, if one invests in stocks without knowing how it works, he/ she is in
deep trouble of losing his/ her money. The key is to understand the stock market and
bonds.

Investing in Stocks
One of the investment instruments invented for building wealth is the stocks.
A Stock is an official evidence of part- ownership of a stock company which may
be used in claiming company’s assets and earnings. Stocks usually in the form of
certificates, are issued by the company to the buyer of the stocks. Stocks are also known
as share of equity (Orines, 2016). Figure 1 shows an example of a stock certificate.
A prospective investor may buy shares of stock in order to trade them in the stock market,
to earn through its dividends, or to take control of the corporation. Regardless of one’s
objective in buying shares of stocks (or even corporate bonds), it would be smart to study
first if the company where the money will be invested in will most likely to produce optimal
profit (Blay et.al, 2020).

4
Figure 1. ABC Widget Company Stock Certificate

Kinds of Stocks
Preferred stock owners are guaranteed a fixed dividend for as long as they own
the stock. Preferred stockholders are given some extent of ownership of the company
but usually do not enjoy the same voting right as the common stockholders. The
company, usually controlled by majority common stock holders, has the option to
purchase all or part of the preferred stocks anytime for any reason. In case of company
to pay off debt, the preferred stockholders, together with the creditors and bondholders,
are paid off before the common stock owners.
Common stock owners usually comprise more than half of the totality of the
company’s stocks. Common stockholders control the operation of the company for they
represent ownership. They are given the right to cast a number of votes equivalent to the
number of their shares in electing the members of a board which performs oversight
function into the operation of the company, including management decisions. Most
common stocks enjoy higher return of investment over years of market activities which
are exposed to high risk environment. In this module, we use examples from a common
stock.

5
Basic Elements of Common Stocks
Dividend - share in the company’s profit
Dividend per share- or (DPS) refers to the total dividend a company pays out over
a 12-month period, divided by the total number of outstanding shares.
A steady or growing dividend payment by a company can be a signal of stability
and growth. A declining DPS may be due to reinvestment in a firm's operations or
debt reduction, but may also indicate poor earnings and be a red flag for
financial hardship.
Dividend per share = total dividend/number of shares

Stock Market- venue where buyers and sellers meet to exchange equity shares of
public corporations. It is a place where stocks can be bought or sold. The stock
market is a place where stocks are bought and sold. The Philippine Stock
Exchange (PSE) is the corporation that governs our local stock market.
Market Value (MV)- 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.
Stock yield ratio = dividend per share / market value
Par Value- the per share amount stated on the company certificate. Unlike market
value, it is determined by the company and remains stable overtime.

Example 1. Company ABC declared a P50,000,000 dividends for the common stocks. If
there are 850,000 shares of common stock, how much is the dividend per share?
Solution:
Given: Total Dividend = P50,000,000
Total Shares = 850,000
Find the dividend per share
Dividend per share = total dividend per share/total shares
= 50,000,000/850,000 Therefore, the dividend per share is
Dividend per share= P58.82 P58.82

6
Example 2. A certain software Corporation declared a 3.5% dividend on stock with par
value of P400. Mr. Park own 300 shares of stocks with par value of P500. How much is the
dividend he received?
Solution:
Given: Dividend Percentage = 3.5% or 0.035 Number of shares = 300
Par value = P400
Find the dividend
1st method
Dividend per share = par value x dividend rate
= P400 x 0.035
Dividend per share = P14
Dividend = dividend per share x no. of shares
= P14 x 300
Dividend = P4,200

2nd method
Dividend = (Dividend Percentage)(Par Value)(No. of Shares)
= (0.035)(P400)(300)
Thus, the dividend is P4,200
Dividend = P4,200

Example 3. A 4% stock yields 5%. What is the market value of the stock with face value
=P=100?
Given:
Dividend rate= 4%
Stock yield rate = 5%
Face Value = =P=100
Find: Market value
Market value of the stock = 0.04/0.0.5 × 100 = 80

Thus, the market value of the


stock is =P=80

7
Example 4. Corporation Y with a market value of P52, gave a dividend of P8 per share for
its common stock. Company Z, 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.
Solution:
Given:

Corporation Y Corporation Z
Market Value = P52 Market Value = P95
Dividend per share = P8 Dividend per share = P12
Stock- yield ratio = Dividend per share/ Stock- yield ratio = Dividend per share/
Market Value Market Value
Stock yield ratio = P8/P52 Stock yield ratio = P12/P95
=0.1538 or 15.38% =0.1263 or 12.63%

Corporation Y has a higher stock- yield ratio than Corporation Z. Thus each peso
will earn you more if you invest in Corporation Y than in Corporation Z. If all other
things are equal, then it is wiser to invest in Corporation Y.

Buying and Selling Stocks


Traders in the stock market use different kinds of investment tools in order to better decide
whether they will buy, sell, or hold on to stocks. Some of these investment tools are (1)
SAM Table of Bo Sanchez’s Truly Rich Club; (2) Fundamental Investment Guide of
Citiseconline Financial Philippines or COL Financial Phils.; and (3) Table of Values of
PinoyInvestor.com. Figure 2 is a sample Fundamental Investment Guide of COL Financial
Philippines

8
My First COL Investment Portfolio – I The Corporate Slave (wordpress.com) Retrieved 12/01/21

Figure 1: COL Financial Fundamental Investment Guide

Provided in the figure above are the corporations and companies that publicly trade
their stocks. For instance, ABS- CBN Broadcasting Corporation (ABS) stock has a prevailing
price of =P=45.95 per stock in the market. FV stands for fair value of the fair market value
of the stocks according to the estimate of COL analyst. Here COL Financial estimates
that ABS stocks have a fair market value of P72.00 per share. The “Buy Below” column
indicates the price limit at which investors are suggested to buy the stock. Since the
current price of the ABS stocks is below the “Buy Below” price (BBP) of =P=60.00, the
Rating or suggested action is to BUY. When the current price exceeds the BBP, the table
will rate it HOLD or to stop buying. When the current price reaches almost or exceed the
FV, that is the time that the stockholder will be suggested to sell.

9
Example 5. You bought one (1) ABS stock at =P=45.95 and the price later reaches the FV
=P=62.00; a. What is the growth rate of your investment? b.) How much would you earn
by selling 700 shares? c. What will be the Expected Growth Rate?
a. What is the growth rate of your investment?
Given:
Growth = (FV – price)/price Your investment had a 34.93%
= (P62.00- P45.95)/P45.95 growth rate
Growth = 0.34929 x 100% = 34.93%

b. How much would you earn by selling 700 shares?


Earnings = (FV – price) x number of shares
By selling 700 shares at fair value
Earnings = (P62.00- P45.95) x 700 shares
of P62, you earned P11, 235
Earnings = P11, 235

c. Expected Growth Rate = (FV – BBP)/BBP


= (62 – 60)/60
Expected Growth Rate = 3.33%

The BBP is determined by dividing the FV by .00333 such that when the
share is bought following the BBP as a guide and the same is later on sold
at the FV, there will be, at the minimum, a growth of 3.33%

Example 6. An online investment tool that you are using shows that the price of Jollibee
stock is =P=193.27 with an estimated fair market value of =P=230.00 and a Buy Below Price
of =P=199.70.
a. What course of action should you take?
b. What is the expected growth?
c. Say you bought 500 shares today and after 1 year the price of the Jollibee stocks
reached =P=230 per share. How much will your earning be if your sell all your 500
Jollibee stocks? What is the growth rate of your investment?

10
d. Say in (c) above, the price reached =P=229.19 only. As a smart investor, what
course of action will you take? Explain and substantiate your answer.

Answer:
a. You should buy because the price is still under the Buy Below Price.
b. The expected growth is 15,2%
Expected Growth Rate = (FV – BBP)/BBP
= (230 – 199.70)/199.70 = 0.1517
Expected Growth Rate = 15.17%

c. If you bought and sold 500 shares, you would earn =P=36.73 per share or total
earnings of =P=18,365.00. The growth rate of your investment is 19%.
Earnings per share = Face Value - Price
= =P=230 - =P=193.27
Earnings per share = =P-36.73

Earnings = Total Number of Stocks to Sell x Earnings per share


` = 500 shares x 36.73
Earnings = =P=18,365

Growth Rate = (FV – price)/price


= (230- 193.27)/193.27
Growth Rate = 0.190045 or 19%

d. The proper course of action is to SELL because the current price is almost at the
FV. Total earnings and growth rate are.
Growth = (229.19 – 193.27)/193.27
Growth = 18.60%

11
BONDS
If stocks are equity, bonds are debt. Stockholders are part-owners of a
corporation, while bondholders are creditors to the corporation. A bondholders have a
higher claim on assets than stockholders. In case of bankruptcy, a bondholder will get
paid before a stockholder. But bondholder is not entitled for profit- sharing. He is entitled
only to the principal with interest. In general, bonds yield lower return and expose to lesser
risk than stocks.
A bond is an official promissory document issued by a debtor stating the
acknowledgement of the amount of debt and the pledge to pay back the loaned
amount. The pledge includes the desire to make periodic interest payments at a stated
rate and to repay the principal on certain date. Bonds are described as fixed- income
securities because the exact amount is known if the bond is held until maturity.
The owner of the bonds is the credit of the issuer of the bond. The issuer of bonds
are government and corporations. Buying a bond does not make the bondholder a
company stockholder.
Bonds are typically issued by companies to interested investors for the purpose of
raising funds in financing programs and projects, maintaining of expansion of ongoing
operations, or rescheduling other debts. This is done in lieu of securing loans from banks
and other financial institutions.
On the part of the investor, typically banks, the purchase of bonds depends on its
liquidity, marketability, and security. The investor may also look into the credibility of the
bond issuer, the bond’s expiration date, and the interest rate as oppose to the prevalent
market interest rate.

Basic Elements of Common Bonds

Bond- is interest- bearing security which promises to pay;


(1) the stated amount of money on the maturity date, and
(2) regular interest payments called coupons

12
Coupon or Dividend- the periodic interest payment that the bondholder receives
during the time between purchase date and maturity date; usually received semi
-annually.
Coupon rate- the rate per coupon payment period; denoted by r.
Price of a Bond- the price of a bond at the purchase time; denoted by P.
Face Value or Par 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 a 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 Bond- present value of all cash inflows to the bondholder

Example 1. Determine the amount of semi- annual coupon for a bond with a face value
of =P=300,000 that pays 10%, payable semi- annually for its coupons.
Given:
Face value (F) = =P=300,000
Coupon rate = 10% or 0.10 per annum (p.a.) or 0.10/2 = 0.05 semi- annual
Find: Amount of Semi- Annual coupon
Semi- Annual coupon = =P=300,000 x 0. 05
Semi- Annual coupon = =P=15,000
or
Semi- Annual coupon = (=P=300,000 x 0.10)/2
Semi- Annual coupon = =P=15,000 Thus, the amount of semi- annual
coupon is =P=15,000

NOTE: the coupon rate is used only for


computing the coupon amount,
usually paid semi- annually. It is NOT the
rate at which money grows. Instead,
current market conditions are reflected
by the market rate and is used to
compute the present value of future 13
payments
Example 2. Suppose that a bond has a face value of =P=100,000 and its maturity date is
10 years from now. The coupon rate is 5% p.a. payable semi- annually. How much will the
bondholder receives, and in how many number of payments?
Given:
Face value= =P=100,000
Thus, the bondholder with an
Maturity = 10 years investment of =P=100,000 with a
Coupon rate = 5% or 0.05 p.a. coupon rate of 5% p.a. at t=10, will
receive 20 payments of =P=2,500
Find: Number of payments to received.
each.
Coupon value/ amount semi- annually

10 years at semi- annual = 10 years x 2 payments in 1 year = 20 payments


Amount Semi- Annual = (=P=100,000 x 0.05/2 (semi- annual)
Amount Semi- Annual = =P=2,500

Summary

STOCKS VS. BONDS


An equity instrument carrying A debt instrument with a
ownership interest. promise to pay the back
with interest.
The investor (stockholder) The investor act as creditor.
Nature
represents ownership or The company is indebted to
equity. the investor.
Stocks represent ownership in Bonds represent money lent
a Business (aka Equity) to a Business (aka Debt).
Traded (buy/ sell) Opportunity Fix maturity value and date
Dividend Return Interest
Voting rights in the company Additional benefits Preferential treatment when
bond matures.

14
Application
A. Investing in Stocks
1. A man purchased 300 shares of stock from the market at =P=800 per share. If a
dividend of 24% is declared, find his earning percent on the investment.

2. A 3.5% stock yields 6.5%. What is the market value of the stock with face value
=P=120?

3. A corporation declares an annual dividend of 4.5%. You own 500 shares (par
value =P= 90). How much dividend will you receive?
4. The capital stock of a company is =P=500,000 and is divided into 5,000 shares
of common stock. If the company pays a dividend of =P=64,000, what amount
will Mark receive for his 50 shares?

5. ABC Corporation with a market value of =P=78, gave a dividend of =P= 10 per
share for its common stock. Company XYZ with a current market value of =P=57,
gave a dividend of =P= 8 per share. Use the stock yield ratio to measure how
much dividends shareholders are getting in relation to the amount invested.

B. Buying and Selling Stocks.


The table below list the companies that you invested by buying a share of
stocks. You get stock dividends from these investments, but you still want to earn
more by selling some of your shares in the stock market. You refer to the
investment guide and wants to find out if selling some of your shares is good.
Fill in the table of with the needed information. Refer to figure 2 COL Investment
Guide. Show your computation for each transaction.

15
Based from
your data,
Explain
Shares of Expected are you
Company Name Growth Rate your
Stocks Growth Rate going to sell
decision
your stocks?
YES/NO
1. Metropolitan 500
Bank & Trust

2. Cebu Air Inc 1000


3. GMA Network 200

4. International 450
Container Term,
SVCS
5. Alliance Global 350

6. Ayala Corp. 800


7. First Philippine 700
Holdings

8. Metro Pacific 300


Investments

9. SM Investment 950

10. Pure Gold Price 2000


Club Inc.

16
C. Bond Investments

1. Determine the amount of semi- annual coupon for a bond with a face value of
=P=580,000 that pays 8% payable semi- annually for its coupons.
2. Suppose that a bond has a face value of =P=50,000 and its maturity date is 7 years
from now. The coupon rate is 11.5 % per annum payable semi- annually. How much will
the bondholder receives, and in how many number of payments.
3. ABC Corporation issued a bond with a par value of =P=2,000.00 per share selling at 95
with coupon rate of 6% p.a. and a term of 5 years. How much does each share cost?
4. Unicorn, Inc. offers bonds with =P=2,500,00 per share per value selling at 95 with coupon
rate of 6% per annum and a term of 5 years. How much would ten (10) shares cost?
5. You bought a corporate bind representing 50 shares with par value of =P=1.000 sold at
97 with a coupon rate of 6% per annum and a term of 10 years.
a. How much will your semi= annual earnings be?
b. What is the growth rate considering how much you bought the bonds for?
(Note: growth rate = total earnings divided by total investment)

Reflection
The Best Choice
You want to grow you’re your money in 3 years. After carefully searching for possible
investment opportunities, you found the following;
I. ABC Corporation offers 500 shares of corporate bond with a par value of =P=1,000 is
selling at =P=98 with a coupon rate of 8%p.a. with a term of 3 years.
II. XYZ Corporation offers 15,000 shares at the price of =P=45.10 with an FV of =P=55.4
and a BBP of =P=48.17. Assume that after 3 years, the price of the stock will reach the
FV.
III. UNI Bank offers 3.1% per annum for its 3- year time deposit at a minimum deposit of
=P=500,000.00
Which of the three do you think is the best option if you have =P=600,000 to invest and
can choose one among the three? Substantiate your answer with the values you get
from comparing the three. (You may present your solution in a table of values for easier
comparison).

17
REFERENCES:
Books

Chan, J.T, General Mathematics (2019), Vibal Group Inc., Quezon City

Orines, F.B. (2016), Next Century Mathematics, Phoenix Publishing

Blay, B.E., Gonzales, J.O.,& Zaragoza, I.J. (2020), Mathematics Trips in the Modern World,
Anvil Publishing, Inc., Mandaluyong City

Website

https://www.colfinancial.com/ape/final2/home/new_to_investing.asp

https://www.investopedia.com/terms/b/bond-yield.asp#bond-yield-vs-price

18
METADATA

Title : Basic Concepts of Stocks and Bonds


Language : English
Keywords : investment, stocks, dividend, buying and selling, par value, market
value, bonds, coupon, maturity value
Description : This module will help students get a good idea about the two types
of investments- stocks and bonds, and how investing to this two
works.
Primary Media : Print/online/offline
Primary Storage : Sent thru messenger/ moodle/googleclassroom/ USB drive
Resource Location : ASU CIT, Kalibo
Compiler : Ms. Rosyl May J. Tiaña

19

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