Question

What are bonds? What are their features and how are they traded?

•b. What are stocks? What are their features and how are they traded?

•c. How do you calculate an annual rate of return?

•d. You buy a share of stock for $100 and it pays no dividend. A year later the market price is $105. What is the rate of return?

•e. You buy a share of stock for $100 and a year later the market price is $105 and it pays a dividend of $2. What is the return?

Answer 1

Step-by-step explanation:

a) A bond is simply a type of loan. Investors lend a company money when they buy its bonds. In exchange, the company pays an interest “coupon” (the annual interest rate paid on a bond, expressed as a percentage of face value) at predetermined intervals (usually annually or semiannually) and returns the principal on the maturity date, ending the loan.

b) Owning stocks means you're also a company owner.

When you buy stocks (shares ), you're buying a share of the company's assets and its profits. In fact (and in law), you're a part owner of the company. It gives you a right to own the Company in the proportion of money you invested. Such stocks are also traded on stock exchange if it is a listed company.

c)

The annual rate of return is calculated by taking the amount of money gained or lost at the end of the year and dividing it by the initial investment at the beginning of the year. E.g you invested $100. you earned $20 in one year. So annual rate of return will be 20/100= 20%.

d) Total amount gained is $5 (105-100). Amount invested was $100. So return is 5/100 = 5%.

e) Total amount gained is $7. That is 5 (105-100) plus 2 (dividend). Amount invested was $100. So return is 7/100 = 7%.