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Basic Concepts of

Stocks and Bonds


GROUP THREE
A form of equity financing or

Stocks raising money by allowing


investors to be part owners of
the company

A form of debt financing, or


raising money by borrowing
from investors Bonds
Stocks Share in the ownership of a company

Definition of Dividend Share in the company’s profit

Dividend Per Share Ratio of dividend to the number of shares


Terms
Stock Market A place where stocks can be bought or sold

in Relation to Market Value The current price of a stock at which it can be sold

Stock Yield Ratio


Stocks
Ratio of the annual dividend per share and the
market value per share

Par Value The per share amount as stated on the company


certificate
A certain financial institution declared P30,000,000 dividend
Example 1 for the common stocks. If there are a total of 700,000 shares
of common stock, how much is the dividend per share?
Given: Total Dividend = P30,000,000
Total Shares = 700,000
Find: Dividend per Share

Solution.

Dividend per Share = Total Dividend / Total Shares


= 30,000,000 / 700,000
= 42.86

Therefore, the dividend per share is P42.86


A certain corporation declared a 3% dividend on a stock
Example 2 with a par value of P500. Mrs. Lingan owns 200 shares of
stock with a par value of P500. How much is the dividend
she received?
Given: Dividend Percentage = 3%
Par Value = P500
Number of Shares = 200
Find: Dividend
Solution.
Dividend = (Dividend Percentage)(Par Value)(No. of Shares)
= (0.03)(500)(200)
= 3,000

Thus, the dividend is P3,000


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
Example 3 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.
Given:
Corporation A: Dividend per share = P8 Corporation B: Dividend per share = P12
Market Value = P52 Market Value = P95
Find: Stock yield ratio
Solution.
Stock yield ratio = Dividend per share Stock yield ratio = Dividend per share
Market value Market value
= 8/52 = 12/95
= 0.1538 = 15.38% = 0.1263 = 12.63%
Corporation A has a higher stock-yield-ratio the Corporation B. Thus, each
peso would earn you more if you invest in Corporation A
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
Definition of Coupon Periodic interest payment that the bondholder receives
during the time between the purchase and maturity

Terms date

Coupon Rate The rate per coupon period; denoted by r

in Relation to 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 F
Bonds Term of a Bond Fixed period of time at which bond is redeemable

Fair Price of a Bond Present value of all cash inflows to the bondholder
Determine the amount of the semi-annual coupon for a
Example 4 bond with a face value of P300,000 that pays 10%, payable
semi-annually for its coupons.
Given: Face Value F = 300,000
Coupon rate r = 10%
Find: Amount of semi-annual coupon
Note: The coupon rate is
Solution. used only for computing
the coupon usually paid
semi-annually
Semi-annual coupon = (F x r) / 2
= [(300,000)(0.10)] / 2
= P15,000

Thus, the amount of the semi-annual coupon is P15,000


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-
Example 4 annually. Find the fair price of this bond, assuming that the annual
market is 4%
Given: Coupon rate r = 5%, payable semi-annually
Face Value = 100,000
Time to maturity = 10 years
Number of periods = 2 x 10 = 20
Market rate = 4%
Find: Amount of semi-annual coupon

Solution.
Semi-annual coupon = (Face Value)(r/2)
= 100,000 (0.05/2)
= 2,500
The bondholder receives 20 payments of P2,500 each,
and P100,000 at t = 10
Present value of P100,000:
Example 4 10
P = F / (1+j) n = 100,000 / (1+0.04)
= 67,556.42

Present value of 20 payments of P2,500 each:


Convert 4% to equivalent semi-annual rate:
1
(1+0.04) = [1+ (i 2/2)] 2
= 0.019804
-n
P = R [1-(1+j) ] / j
= 40,956.01

Price = 67,556.42 + 40,956.01 = 108,512.43

Thus, a price of P108,512.43 is equivalent to all future payments,


assuming an annual market rate of 4%
Dividend per Share = Total Dividend / Total Shares

Dividend = Dividend Percentage x Par Value x No. of Shares

Stock yield ratio = Dividend per share / Market value

Semi-annual coupon amount = (Face value x Coupon rate) / 2

Things
Things to
to Remember
Remember
Try
Try these:
these:
A financial institution
declared a dividend of Find the amount of the
P50,000,000 for its common semi-annual coupon for a
stock. Suppose there are P300,000 bond which pays
350,000 shares of common 5% convertible semi-
stock, how much is the annually for its coupons.
dividend per share?
Market Indices for
Stocks and Bonds
GROUP THREE