Lesson 3.

7: Bonds and Stocks

Learning Objectives
At the end of the lesson, you(student) should be able to:

1. Gain an understanding of bonds and stocks.

2. Solve problems involving stocks and bonds.

Materials and Equipment Needed

1. Lecture Notebook
2. Assessment Notebook
3. Black ballpen
4. Intermediate paper

Learning Activities (Activating Prior Knowledge)

Use your assessment notebook to answer this part.
Arrange the following letters to create the word/words:
1) DDDIIVEN
2) RISENTET
3) NBODS
4) TSCOKS
5) RAP EVAUL

What do these words mean? Do you have any idea?

Learning Probe (Analysis)

Use your assessment notebook to answer this part.
Essential questions:
 When you receive corporate profits from your ownership of stock, you are____.
o Buying low and selling high
o Buying high and selling low
o Gaining dividends
  If there are 700,000 shares in the corporation and you own 40% of the company, how
many shares do you have?
 What would be the current yield of a bond whose face value is Php 13,00 and pays a
yearly interest of 12% if purchased atface value of Php 12,000?

Learning Time (Acquire New Knowledge)

Many of us deal with stocks and bonds (or want to!) but have no idea what they are worth.
Maybe you want to try investing. Either way, it is good to know the difference between stocks
and bonds and have a basic understanding of how they are valued.
Important terms to know

Stocks

Stock refers to the shares in the ownership of the company. Stock represents a claim on the
company's assets and earnings. As you acquire more stock, your ownership stake in the
company becomes more significant. Whether you say shares, equity, or stock, it all means the
same thing.

Stock/shareholder

If you buy some stocks in a specific company, you are called a stockholder. A person
who owns a share or stocks.

Dividend

Being a stockholder, a person receives a dividend. A dividend is the amount of

stockholders’ share of the company’s earnings or profit.

Amount of Dividend

𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

DPS (n) =
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠

Total amount of dividend

n = Par Value x Dividend rate x Number of shares

Par Value

The company’s charter sets the value of the common share. The per-share amount is as
stated on the company’s certificate.

A stockholder’s ownership of a company can be computed by using the formula:

𝑆𝑜
P=
𝑆𝑇
Where P is the part of the stockholder’s ownership of the company, So is the number of shares
that the stockholder owns, and ST is the total number of shares issued by the company.

Bonds

A bond is a debt. It is the loans provided to an organization like government, business,

company, or corporation. A debt instrument with a promise to pay back with interest (the price
that the company pays for borrowing your money).

Bondholder

A person who invests in bonds.

Par Value (of bond)

It is the principal borrowed from the bondholder.

Interest on Bond (I)/Coupon

If the stockholder receives a dividend, the bondholder receives interest. We can use the
formula to solve for the interest.

𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑚𝑜𝑛𝑡 ℎ𝑠
I = Par Value x Rate x
12 𝑚𝑜𝑛𝑡 ℎ𝑠
Current yield (Y)

This represents the return an investor would expect to earn a year.

𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

Y=
𝑝𝑢𝑟𝑐 ℎ𝑎𝑠𝑒𝑑 𝑝𝑟𝑖𝑐𝑒

Price of bond

𝑉 (1+𝑖)𝑛 −1
P= + 𝐹𝑏
(1+𝑖)𝑛 𝑖(1+𝑖)𝑛

Where, P = price of bond, V = redemption value of bond, 𝑖 = periodic interest rate, n = number
of payments, k = coupon payment, F = Par value, b = periodic bond interest.

Sample problems in stocks

1) Miss Ababat owns 350 shares of stocks in a company that issued 70,000 shares. What
part of the company is owned by Miss Ababat?
Given: So = 350 ST = 70,000
Find: P=?

Solution:
𝑆𝑜
P=
𝑆𝑇
350
P=
70,000
1
P=
200
P = 0.005 %

Therefore, Miss Ababat owns 1/200 or 0.005 % of the company.

2) Degorio Mining Company declared a Php 800 million dividend for its common stocks. If
there were 2,500,000 shares of common stock, how much is the dividend per share?

Given:
Total number of dividend = P800,000,000
Total number of shares = P2,500,000
Find:
DPS (n) =?
Solution:

𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

DPS (n) =
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠
800,000,000
DPS (n) =
2,500,000

DPS (n) = 𝑃 320.00

Therefore, the amount of dividend per share in Degorio Mining Company is P320.00

3) Happy Mining Company declared a 2.5 % dividend on stock with a par value of Php 750.
If Mr. De la Cruz owns 450 shares, how much dividend will he receive?

Given:
Dividend rate = 2.5 % = 0.025
Par Value = Php 750
Find:
n=?
Solution:
 n = Par Value x dividend rate x number of shares

n = 750 x 0.025 x 450

n = P8,437.50

Therefore, the amount of dividend Mr. De la Cruz will receive is P8,437.50.

Sample problems in bonds

1) Find the periodic interest on a bond with a par value of Php 80,000, which pays 4 %
interest in 6 months.

Given: Par Value = P80,000

Rate = 4% = 0.04
Time = 6 months
Find:
I =?
Solution:
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑚𝑜𝑛𝑡 ℎ𝑠
I = Par Value x Rate x
12 𝑚𝑜𝑛𝑡 ℎ𝑠
6 𝑚𝑜𝑛𝑡 ℎ𝑠
I = 80,000 x 0.04 x
12 𝑚𝑜𝑛𝑡 ℎ𝑠
I = P1,600.00

Therefore, the periodic interest on bond is Php 1,600.00

2) Compute the current yield of a bond whose par value is Php 40,00 and which pays an
annual interest of 5 %, if it is purchased at:
a. Par Value
b. 45,000
c. 38,000

A. Given: Par Value = P40,000

Rate = 5% = 0.05
Purchased price= P40,000
Find: Y = ?
Solution:
𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
Y=
𝑝𝑢𝑟𝑐 ℎ𝑎𝑠𝑒𝑑 𝑝𝑟𝑖𝑐𝑒

𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒 𝑥 𝑟𝑎𝑡𝑒

Y=
𝑝𝑢𝑟𝑐 ℎ𝑎𝑠𝑒𝑑 𝑝𝑟𝑖𝑐𝑒
 40,000 0.05
Y=
40,000

Y = 0.05 = 5 %

Therefore, the current yield of a bond purchased at P40,000 is 5%.

B. Given: Par Value = P40,000

Rate = 5% = 0.05
Purchased price= P45,000
Find: Y = ?
Solution:
𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
Y=
𝑝𝑢𝑟𝑐 ℎ𝑎𝑠𝑒𝑑 𝑝𝑟𝑖𝑐𝑒
𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒 𝑥 𝑟𝑎𝑡𝑒
Y=
𝑝𝑢𝑟𝑐 ℎ𝑎𝑠𝑒𝑑 𝑝𝑟𝑖𝑐𝑒
40,000 0.05
Y=
45,000

Y = 0.0444 = 4.44 %

Therefore, the current yield of a bond purchased at P45,000 is 4.44%.

C. Given: Par Value = P40,000

Rate = 5% = 0.05
Purchased price= P38,000
Find: Y = ?
Solution:
𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
Y=
𝑝𝑢𝑟𝑐 ℎ𝑎𝑠𝑒𝑑 𝑝𝑟𝑖𝑐𝑒
𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒 𝑥 𝑟𝑎𝑡𝑒
Y=
𝑝𝑢𝑟𝑐 ℎ𝑎𝑠𝑒𝑑 𝑝𝑟𝑖𝑐𝑒
40,000 0.05
Y=
38,000

Y = 0.0526 = 5.26 %

Therefore, the current yield of a bond purchased at P38,000 is 5.26%.

3) A Php 3,200 at 9% bond pays coupons quarterly and will be redeemed on July 7,2020.
Find the price if the bond is bought on July 7, 2016, to yield 8% compounded quarterly if
the bond is redeemable at par value.
Given:

V = Php 3,200, 𝑖 = 8% or 0.08/4 = 0.02, n= 4(4) = 16

F = Php3,200 b = 0.09/4 = 0.0225 k = Fb = (3,200)(0.0225)=72

Solution:

𝑉 (1+𝑖)𝑛 −1
P= + 𝐹𝑏
(1+𝑖)𝑛 𝑖(1+𝑖)𝑛

3,200 (1+0.02)16 −1
P=
(1+0.02) 16 + (72) (0.02)(1+0.02)16

P = Php 3,308.62