CC3152_L09_ch12+ - CC3152 Principles of Financial Planning...

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Unformatted text preview: CC3152 Principles of Financial Planning ˟˘˖˧˨˥˘ʳˌ INVESTING IN STOCKS & BONDS 5-2 1. Business 2. Financial 3. Market 4. Purchasing Power 5. Interest Rate 6. Liquidity 7. Event (I) The Risks Of Investing [LG1,2] 5-3 1. Business Risk – degree of uncertainty associated with a firm’s earnings and subsequent ability to pay interest and dividend 2. Financial Risk – investment risk associated with the mix of debt and equity financing used by the issuing firm 5-4 3. Market Risk – the price volatility of a security 4. Purchasing Power Risk – a significant effect on investment returns resulting from possible changes in price levels 5. Interest Rate Risk – the changing of market interest rates that affects fixed income securities 5-5 6. Liquidity Risk – the inability to liquidate an investment conveniently and at a reasonable price 7. Event Risk – some major and unexpected event occurred that leads to a sudden and substantial change to the value of an investment 5-6 Returns from Investing Current Return – income while you hold the security + Future Return or Capital Gain – gain on the sale of the investment = Total Return on the investment 5-7 The Risk-Return Trade-Off If you want GREATER RETURN , you will most likely have to accept GREATER RISK 5-8 The Risk-Return Relationship 5-9 What Makes A Good Investment? ! Future return ! Approximate yield ! Desired rate of return 5-10 Approximate Yield Formula where CI = average annual current income FP = expected future price of investment CP = current market price of investment N = investment period 5-11 ! Each share represents equity or part ownership in the company. ! Stock ownership allows the investor to participate in the profits of the firm. ! Stock ownership is a residual; other obligations of company must be paid first. (II) Investing in Common Stock [LG3,4] 5-12 ! Usually one share = one vote ! Most small shareholders assign their votes to a proxy , another party who will vote for them ! Voting rights are not particularly important to small shareholders Voting Rights 5-13 ! Usually paid quarterly. ! Can be paid even when company shows a loss. ! Paid either in cash or in additional shares of stock. ! Compare stocks based on dividend yield rather than dollars received if you are investing for current income. Dividend Yield = Annual dividends per share Market price per share Dividends 5-14 Types of Common Stock ! Blue-Chip — issued by large, well established companies....
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This note was uploaded on 03/17/2009 for the course AF 3152 taught by Professor Peggy during the Spring '09 term at Hong Kong Polytechnic University.

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CC3152_L09_ch12+ - CC3152 Principles of Financial Planning...

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