11 - 1 copyright © 2008 by nelson, a division of thomson canada ltd chapter 11 – investing in...
Post on 21-Dec-2015
217 views
TRANSCRIPT
COPYRIGHT © 2008 by Nelson, a division of Thomson Canada Ltd
11 - 1
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 2
Chapter 11 - Learning Goals
LG 1 - Describe the various types of risks and the sources of return to which investors are exposed in their search for an acceptable investment.
LG 2 - Discuss the merits of investing in common stock, the different types of common stock investments, the various measures of performance, and the valuation of stocks.
LG 3 - Discuss the merits of investing in bonds, the different types of bonds, the various measures of yield, and bond price behaviour.
LG 4 - Describe the basic features of mutual funds and other types of professionally managed investments.
LG 5 - Discuss the merits of investing in mutual funds, the types of funds available and the investment objectives these funds seek to fulfill.
LG 6 - Describe the variables that should be considered when selecting funds for investment purposes.
Learning Goals
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 3
Internet Links and On-Line Resources
• What’s your risk tolerance. Take quizzes at the Investor Education Fund.• You can compare the risk of a particular stock or your portfolio with the
overall market with this tool at RiskGrades.• Starmine Investor – discover which securities analysts have been most
accurate in estimating a company’s earnings.• Find the meaning of investment terms at InvestorWords.com.• Learn about the American Depositary Receipt (ADR) market at J.P.
Morgan’s site.• Financial Times website for information on overseas business news.• Learn about investment clubs at investorguide.• Find out what companies offer Dividend Reinvestment Plans at
Computershare Website.• “Investing in Bonds” at the Bond Market Association’s website.• Learn about Canada’s mutual funds through the Mutual Funds Dealers
Association of Canada Website.• Brill’s Mutual Fund Interactive Interviews with top mutual fund managers.• Learn more about iShares through Barclays.• Visit EFTConnect.com to get price quotes and find the right ETF for you.• Mutual fund data on Morningstar.ca
Web Links
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 4
Key Chapter Terms and Definitions Business risk Financial risk Market risk Purchasing power risk Fixed-income securities Interest rate risk Marketability risk Liquidity risk Event risk Risk-free rate of return Desired rate of return Residual owners Proxy Dividend yield Stock dividends
Book value Net profit margin Return on equity (ROE) Earnings per share (EPS
) Price/earnings ratio (P/E
) Beta Dividend reinvestment
plan (DRP or DRIP) Coupon Mortgage bond Equipment trust certific
ate Debenture
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 5
Key Chapter Terms and Definitions … Sinking fund Call feature Serial bond Real return bond (RRB) Corporate bond Strip or zero coupon bond Conversion privilege Conversion ratio Conversion value Conversion premium Junk bond Premium bond Discount bond Current yield Yield to maturity Pooled diversification Open-end investment com
pany
Net asset value per share (NAVPS)
Closed-end investment company
Exchange-traded fund (ETF)
Load fund Low-load fund Back-end fund No-load fund Portfolio management fee Management expense
ratio (MER) Automatic investment
plan Automatic reinvestment
plan Systematic withdrawal
plan Conversion (exchange)
privilege
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 6
DefinitionsBusiness Risk
The degree of uncertainty associated with a firm’s earnings and subsequent ability to pay interest and dividends.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 7
DefinitionsFinancial risk
A type of investment risk with the mix of debt and equity financing used by the issuing firm.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 8
DefinitionsMarket risk
A type of investment risk associated with the price volatility of a security.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 9
DefinitionsPurchasing power risk
A type of risk resulting from possible changes in price levels, which can have a significant effect on investment returns.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 10
DefinitionsFixed-income securities
Securities such bonds, notes, and preferred stocks that offer purchasers fixed periodic returns.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 11
DefinitionsInterest-rate risk
A type of risk, resulting from changing market interest rates, that mainly affects fixed income securities.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 12
DefinitionsMarketability risk
The risk of not being able to find a buyer for an investment.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 13
DefinitionsLiquidity risk
A type of risk associated with the inability to liquidate an investment conveniently and at a reasonable price.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 14
DefinitionsEvent risk
The risk that some major, unexpected event will occur, leading to a sudden, substantial change in the value of an investment.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 15
DefinitionsRisk-free rate of return
The rate of return on short-term government securities, such as Treasury bills, that is free from any type of risk.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 16
DefinitionsDesired rate of return
The minimum rate of return an investor feels should be earned in compensation for the amount of risk assumed.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 17
DefinitionsResidual owners
Shareholders of the company, they are entitled to dividend income and a share of the company’s profits only after all of the firm’s other obligations have been met.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 18
DefinitionsProxy
A written statement used to assign a shareholder’s voting rights to another person, typically one of the company directors.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 19
DefinitionsDividend yield
The percentage return provided by the dividends paid on common stock; calculated by dividing the cash dividends paid during the year by the stock’s market price.Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 20
DefinitionsStock dividends
New shares distributed to existing shareholders as a supplement to or substitute for cash dividends.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 21
DefinitionsBook value
The amount of shareholders’ equity in a firm; determined by subtracting the company’s liabilities and preferred stock value from its assets.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 22
DefinitionsNet profit margin
A key measure of profitability that relates the net profits of a firm to its sales; shows the rate of return the company is earning on its sales.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 23
DefinitionsReturn on Equity (ROE)
ROE captures the overall profitability of the firm; it is important because of its impact on the growth, profits, and dividends of the firm.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 24
DefinitionsEarnings per share (EPS)
The return earned on behalf of each share of common stock; calculated by dividing all earnings remaining after paying preferred dividends by the number of common shares outstanding.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 25
DefinitionsPrice/earnings ratio (P/E)
A measure of investors’ confidence in a given security; calculated by dividing market price per share by earnings per share.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 26
DefinitionsBeta
An index of the price volatility imbedded in a share of common stock; provides a reflection of how the price of the stock responds to market forces.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 27
DefinitionsDividend Reinvestment Plan (DRIP)
A program whereby shareholders can choose to take their cash dividends in the form of more shares of the company’s stock.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 28
DefinitionsCoupon
Feature on a bond that defines the annual interest income the issuer will pay the bondholder.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 29
DefinitionsMortgage bond
A bond secured by a claim on real assets, such as manufacturing plant.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 30
DefinitionsEquipment trust certificate
A bond secured by certain types of equipment, such as railroad cars and airplanes.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 31
DefinitionsDebenture
An unsecured bond issued on the general credit of the firm.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 32
DefinitionsSinking fund
A provision in a bond that specifies the annual repayment schedule that will be used to pay off the issue.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 33
DefinitionsCall feature
A feature included in a bond (or preferred stock) issue that allows the issuer to retire the security prior to maturity at some specified, predetermined price.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 34
DefinitionsSerial bond
An issue, usually a municipal bond, that is broken down into a series of smaller bonds, each with its own maturity date and coupon rate.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 35
DefinitionsReal Return (RRB)
A type of government bond that provides protection against inflation by adjusting investor returns for the annual rate of inflation.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 36
DefinitionsCorporate bond
A bond issued by a corporation.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 37
DefinitionsStrip or zero coupon bond
A bond that pays no annual interest but sells at a deep discount to its par value.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 38
DefinitionsConversion privilege
The provision in a convertible issue that stipulates the conditions of the conversion feature, such as the conversion period and conversion ratio.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 39
DefinitionsConversion ratio
A ratio that specifies the number of shares of common stock into which a convertible bond can be converted.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 40
DefinitionsConversion value
A measure of what a convertible issue would trade for if it were priced to sell on the basis of its stock value.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 41
DefinitionsConversion premium
The difference between a convertible security’s market price and its conversion value.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 42
DefinitionsJunk Bond
Also known as high yield bonds, these are highly speculative securities that have received low ratings from DBRS, Moody’s, or Standard & Poor’s; the low ratings mean the issuers could have difficulty meeting interest and principal payments as they come due.Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 43
DefinitionsPremium Bond
A bond that has a market value in excess of par; occurs when interest rates drop below the bond’s coupon rate of return.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 44
DefinitionsDiscount Bond
A bond with a market value lower than par; occurs when market rates are greater than the bond’s coupon rate.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 45
DefinitionsCurrent yield
The amount of current income a bond provides relative to its market price.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 46
DefinitionsYield to maturity
The fully compounded rate of return a bondholder would earn if he or she held it to maturity. (Includes both coupon interest income as well as any capital gain/loss the investor earns on the purchase price.)
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 47
DefinitionsPooled diversification
A process whereby investors buy into a diversified portfolio of securities for the collective benefit of the individual investors.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 48
DefinitionsOpen-ended investment company
A company that can issue an unlimited number of units at a price based on the current market value of the securities it owns; also called a mutual fund.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 49
DefinitionsNet asset value (NAV)
The price at which a mutual fund will buy back its own units (shares); NAV represents the current market value of all the securities the fund owns, less any liabilities.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 50
DefinitionsClosed-end investment company
An investment company that issues a fixed number of shares, which are themselves listed and traded on an organized securities exchange.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 51
DefinitionsExchange-traded fund (ETF)
A type of mutual fund that trades as a listed security; usually structured as an index fund that is set up to match the performance of a certain segment of the market.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 52
DefinitionsLoad fund
A type of mutual fund on which a transaction cost (associated with the purchase of units/shares) is levied.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 53
DefinitionsLow-load fund
A type of mutual fund in which commissions charged on purchases of shares range between only 1 and 3 percent of the purchase price.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 54
DefinitionsBack-end fund
A commission charged for redeeming mutual fund units/shares.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 55
DefinitionsNo-load fund
A mutual fund on which no transaction fees are charged.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 56
DefinitionsPortfolio management fee
A fee paid to the professional money managers who administer a mutual fund’s portfolio.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 57
DefinitionsManagement expense ratio (MER)
The total of all management fees reported as a percent of the total fund assets.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 58
DefinitionsAutomatic investment plan
A type of automatic savings program that enables an investor to systematically channel a set amount of money into a given mutual fund; it provides investors with a convenient way to accumulate capital (also known in the industry as a RIP – regular investment plan)
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 59
DefinitionsAutomatic reinvestment plan
A type of plan offered by most mutual funds that allows shareholders (unitholders) to elect to have dividends and capital gains distributions reinvested in additional fund units/shares.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 60
DefinitionsSystematic withdrawal plan
A type of plan offered by mutual funds that allows unitholders/shareholders to be paid specified amounts of money each period.
Terms
Chapter 11 – Investing in Stocks, Bonds and Mutual Funds
11 - 61
DefinitionsConversion (exchange) privileges
A feature offered by many investment companies that allows investors to switch from one mutual fund to another within a family of funds.
Terms
11 - 62
THE END!