Bonds and their features
Keywords: stock, dividends, coupons
A bond is an obligation to pay back a sum of money obtained from the buyer, with interest as agreed. With a bond there is an agreement to pay an agreed sum of money as interest, spread over a period of time. At the end of the period as agreed the issuer of the bond repays the buyer the principal amount.
Features of bonds
Nominal amount- a bond stipulates the amount that the buyer has paid;
Issue price: this is amount which is paid towards the bond.
Maturity date- this is the date when the principal amount is paid back.
Coupon- this is the interest paid;
Indenture- this is a document that spells the rights of the holder
Currency – there must be a currency in which the bond has been paid.
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So the owner sells some shares. Thereafter shares can be resold. Shares values go up and down in response to the performance of the company.
Features of stock
Liquidation:-if a company goes bankruptcy the shareholders receive their share of proceeds;
Dividends payout: - shareholders are entitled to dividends, which is a share of the profit that is not retained;
Voting rights: shareholders have the right to vote at the general meetings in favor or against certain proposals.
Preemptive rights: - that if a company wants to sell more shares they first give preference to current shareholders.
There is limited liability.
Stocks are sold in designated markets. The places where stocks are sold are called stock exchange. Only members have a right to participate. So these members act as brokers. Those who want to buy or sell come to agreements through these brokers. Once an agreement is done then a deal is sealed. Trading can also be done electronically, by using computer networks.
Calculation of Annual rate of return
Returns are calculated on an annual basis through a percentage. This percent shows how many dollars an investor would get per year per $100, for example. 5% rate of return means an investor gets $5 per every $100. The rate of return is calculated using the following formulae:
[Income+ (gain) divided by the original amount] = rate of return
[Income+ (ending value –original value) divided by original value]=% rate of return.
rate of return=[ income+(ending value-original Value) ]÷original value
rate of return=[ $0+($105-$100) ]÷$100
rate of return=[ income+(ending value-original Value) ]
rate of return=[ $2+($5) ]
In percentage it is 7%
Siegel, R and Yacht, C. (2009). Personal Finance. Flatworld.