Running head: Investment Fundamentals
American InterContinental University
This paper will calculate the returns on five investments to illustrate how they work. It will also discuss the different types of investments a person can make, along with the differences between the various types of bonds. Furthermore it will state what bond ratings indicate, and the two major agencies that are in charge of assigning these ratings
As stated by Gitman, Joehnk, & Smart (2011, p. 3) “Any asset into which funds can be placed with the expectation that it will generate positive income and/or preserve or increase its value.” A dollar in hand today is worth more than a dollar to be received in the future because if you had the money now, you could invest it, earn interest and end up with more than one dollar in the future.
Return on Investments Calculations
The return on a stock that does not pay a dividend of which you buy 100 shares for $25.00 per share and sell the 100 shares for $27.50 a year later, a commission fee of $50.00 for securities, equals to $ 200.00, 92.60% profit. To compute the original price of the shares, 100 shares multiplied by the purchase price $25.00 equals to $2,500.00. The Sale price was calculated by multiplying the number of shares (100) by the selling price ($27.50) which equals to $2,750.0. To compute the return on the stocks the original price ($2,500.00) was subtracted from the sale price less the commission fee ($2,700.00). The return on a 5-year bond that was purchase for $1,000 pays a 6% yearly rate. It is paid semiannually, which is held until maturity equals to $1,343.92, 74.41%. The formula that was used to compute the return is FVn=PV(1+rPER)n PER. The current yield on a bond priced at $89 has a 6% coupon is $1,483.33 which equals to a 67.42% gain on the return. The formula that was used to compute the current yield is market price divided by the coupon rate $89.000.06. The yield-to-maturity (YTM) on a 7.25% ($1,000 par value) bond that has 10 years remaining to maturity, currently trading in the market at $825 equals to 11%. The formula used to compute yield to maturity (YTM) on a financial calculator is 10- n, 825-PV, -72.50=PMT, -1000-FV= 11. The holding period return (HPR) for 1,000 shares of a no-load mutual fund currently selling at a NAV of $11, purchased a year ago at a NAV of $10.50 share, including $300 of distributed investment income dividends and capital gains dividends of $350 equals to $61.90. The investor would receive a 95.45% increase on their original investment. The formula used to compute the holding period return is Income during Period $300 + Capital gain lossduring period($350)Beginning investment value ($10.50)
Types of Investments
Selecting an investment depends on the investor’s resources, goals, and their willingness to take risk. The different types of investments a person can make are short term investment, common stock, fixed- income securities, mutual funds, hedge funds, derivate securities and other populate investments. According to Gitman, Joehnk, & Smart (2011, p. 8) “Short term investment include savings instruments that usually lives for one year or less.” Short term investments are not risky and are considered to carry little or no risk. Short term investments are often used as a warehouse before the money be transferred to long term investment. This type of investment can easily be turn into cash with little lost of the value. Common stock is a certificate that represents partial ownership of a corporation. They are classified as capital market securities because they have no maturity and can serve as a long term source of funds. Some corporations provide income to their stockholders by distributing a portion of their quarterly earnings in the form of dividends. Capital gain occurs when the investor sells their shares for a higher price than the...
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