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

According to Siegel & Yacht, bonds are “publicly issued and traded long-term debt used by corporations and governments.” (2009). OR bond are issued by governments or companies as debt instrument which’s aim is to raise money. Basically it is a contract between a government or a company – that is, the borrower – and investor – that is, the lender.

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Additionally, features of bonds are as following; face value, coupon rate, maturity date, bond duration, and issue price. Face value of a bond is the amount the bond will be worth at maturity and the amount the bond issuer uses when calculating interest payments, coupon rate is the interest rate that the bond issuer will pay on the face value of the bond, coupon dates are the dates on which the bond issuer will make interest payments, maturity date is the date on which the bond will mature and the bond issuer will pay the bond holder the face value of the bond, issue price is the price at which the bond issuer originally sells the bonds, when you buy a bond, you are lending money to the government or company that issued the bond, and in return, the government or company that issued the bond is agreeing to pay your money back, with interest, at some point in the future. 

 

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

Stocks are the shares in the ownership of a company. Stock represents a claim on the company’s assets and earnings, as well stockholder is responsible to bear losses of a company. As you get more stock from a company, your ownership stake in the company becomes greater. There are different words for this such as we can say shares, equity, or stock, it all means the same thing. In fact, there are two main types of stocks; common stock and preferred stock. Features of common stock are; common stock is very easy to buy and sell, it is very easy to find reliable information on public companies, and there are over 11,000 public companies in North America to choose from. While features of preferred stock are; there are higher fixed income payments than bonds or common stocks, lower investment per share compared to bonds, priority over common stocks for dividend payments and liquidation proceeds, greater price stability than common stocks, and greater liquidity than corporate bonds of similar quality.

 

How do you calculate an annual rate of return?

As annual return is the return that an investment provides over a period of time. The rate of return is the amount you receive after the cost of an initial investment, calculated in the form of a percentage. Calculation of annual rate of return is as following; there are two major numbers needed to calculate the rate of return:

Current value: the current value of the item. And original value: the price at which you purchased the item.

Then, these values should be applied to the rate of return formula as below;


((Current value – original value) / original value) x 100 = rate of return


The outcome is always reflected as a percentage, so the formula should be multiplied by 100 to get the percentage. If this percentage is positive so we have profit or gain on our investment and in case, if the percentage is negative so then we have loss on the investment.

 

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?

If we buy a share of stock for $100, and it pays no dividend, and a year later the market price is $105, then our return is = [0 + (105 – 100)] ÷ 100 = 5 ÷ 100 = 5%.

 

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?

If we buy a share of stock for $100, and a year later the market price is $105, the stock pays a dividend of $2, then our return = [2 + (105 – 100)] ÷ 100 = 7 ÷ 100 = 7%.

 

a. 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?

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