QMB3003 Discussion Questions

Because learning changes everything.®
Chapter 11
Discounts: Trade and Cash
Math for Business and Finance: an Algebraic Approach, 3rd Edition
Jeffrey Slater
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Learning Unit Objectives
LU 11-1: Trade Discounts—Single and Chain (Includes Discussion of
Freight).
1. Calculate single trade discounts with formulas and complements.
2. Explain the freight terms FOB shipping point and FOB destination.
3. Find trade discount amount and net price when list price is known and
find list price when net price and trade discount are known.
4. Calculate chain discounts with the net price equivalent rate and single
equivalent discount rate.
LU 11-2: Cash Discounts, Credit Terms, and Partial Payments.
1. List and explain typical discount periods and credit periods that a
business may offer.
2. Calculate outstanding balance for partial payments.
© McGraw Hill
2
Retailer Discounts
• Merchandise sold by retailers is brought from
manufacturers and wholesalers to sell only to retailers, not
customers.
• These manufacturers and wholesalers offer retailer
discounts so retailers can resell the merchandise as profit.
• The discounts are off the manufacturers’ and retailers’ list
price (suggested retail price), and the amount of discount
that retailers receive off the list price is the trade discount
amount.
© McGraw Hill
3
Trade discount- a reduction off the original selling price(list
price of an item and is not related to early payment
Cash discount is the result of an early payment based on the
terms of the sale
The discounts are off the manufacturers’ and wholesalers’ list
price (suggested retail price) and the amount of discount that
retailers receive off the list price is the trade discount amount
When you make a purchase, the retailers (seller) give you a
purchase invoice.
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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11-4
Trade Discount Amount & Net Price
Formulas
Trade discount amount = List price × Trade discount rate
$2,887.50 = $11,550 × 25%
Net Price = List price − Trade discount amount
$8,662.50 = $11,550 − 2,887.50
• The bookstore purchases the book
directly from the publishers (McGrawHill).
• Note- the trade discount amount is
given in percent.
• The trade discount is a percent off the
list price that retailers can deduct.
• The net price is the price the retailer
pays the manufacturer (publisher) or
wholesaler.
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5
Trade Discounts
• Retailers cannot take trade discounts on freight, returned
goods, sales tax, and so on.
• Trade discounts may be single discount or a chain of
discounts.
© McGraw Hill
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Freight Terms
From Buyer Perspective
FOB Shipping Point – buyer pays the freight cost of getting the goods to the
place of business and title transfers to the buyer once the goods are shipped.
FOB Boston – the buyer in Fremont, CA pays the freight.
Boston
Fremont, CA
From Seller Perspective
FOB Destination – seller pays the freight cost until it reaches the buyer’s place of
business. Title does not transfer to the buyer until the goods reach the buyer’s
place of business.
FOB Fremont, CA – the seller in Boston pays the freight.
Boston
Fremont, CA
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7
Single Trade Discounts and Complements
Single Trade Discount – The discount amount
(dollars) a retailer receives when only one
discount is given by the manufacturer/wholesaler.
Single Trade Discount Rate – The discount
rate (percentage) a retailer receives when only
one discount is given by the
manufacturer/wholesaler.
Complement – The difference between the single
discount rate and 100%. The complement is what
percentage the buyer will pay.
Example:
Trade discount = 25%
Complement = 100% − 25% = 75% or .75
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8
Single Trade Discount
The price of a MacBook Pro is $2,700. The manufacturer offers a
40% trade discount. What are the trade discount amount and the
net price?
Two approaches to solving for the net price:
A. Solve using two steps – Find the trade discount amount, then
the net price:
Trade Discount Amount = $2,700 × .40 = $1,080
Net price = $2,700 − $1,080 = $1,620
B. Solve for the net price directly using the complement: if the
trade discount is 40%, the complement is 60% (100% − 40%).
Net price = $2,700 × .60 = $1,620
© McGraw Hill
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Calculating List Price When Net Price & Trade
Discount Rate Are Known
List Price =
Net Price
Complement of Trade Discount Rate
Example:
A MacBook Pro has a $1,620 net price and a 40% trade discount. What is the list
price?
1. Find the complement of the trade discount rate: 100% − 40% = 60%.
$1,620
= $2,700
2. Calculate the list price:
0.60
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10
Chain Discounts
• Frequently, manufacturers want greater flexibility in setting
trade discounts for different classes of customers,
seasonal trends, promotional activities and so on.
• To gain this flexibility some sellers give chain or series
discounts. This is basically a trade discounts in a series of
two or more successive discounts.
• Sellers list chain discounts as a group: 20/15/10 implies a
discount of 20% off the list price, then successive
discounts of 15% and 10%.
• Warning: Do not just add up the discounts to calculate the
discount!
© McGraw Hill
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Calculating Net Price With a Chain
Discount
Example:
Calculate the Net Price for a chain of discounts of 20/15/10.
The list price of the office equipment is $15,000.
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Calculating Net Price Using Net Price Equivalent
Rate
1
The Net Price Equivalent Rate is a decimal equivalent used
as a shortcut to compute the net price when a chain of
discounts is offered.
3 steps
1. Subtract each chain discount rate from 100% and convert
each percent to decimal.
2. Multiply the decimals. Do not round off decimals, since the
number is the net price equivalent rate.
3. Multiply the list price times the net price equivalent rate.
© McGraw Hill
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Calculating Net Price Using Net Price Equivalent
Rate
2
Example:
Using the net price equivalent rate calculate the Net price for a chain of discounts
of 20/15/10 The list price of the office equipment is $15,000.
1. Find the net price equivalent rate with a chain of discount of 20/15/10, then
multiply the complements:
100%
100%
100%
−20
−15
−10
.08
×
.85
×
.90 = .612 net price equivalent rate
2. Calculate the net price: Net Price = List Price × Net Price Equivalent Rate
Net price = $15,000 × .612 = $9,180
Trade discount amount = $15,000 − $9,180 = $5,820
© McGraw Hill
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Calculating Trade Discount Amount Using Single
Equivalent Discount Rate
The Single Equivalent Discount Rate is a decimal equivalent used as a shortcut
to compute the trade discount when a chain of discounts is offered.
Single Equivalent Discount Rate = 1 − Net Price Equivalent Rate
Example:
To calculate the Trade Discount for a chain of discounts of 20/15/10 and a list
price of $15,000 using the single equivalent discount rate:
1. Find the net price equivalent rate by multiplying
the complements:
.80 × .85 × .90 = .612
2. Find the single equivalent discount rate by
subtracting the net price equivalent rate from 1:
1.00 − .612 = .388
3. Calculate the trade discount amount:
Trade Discount = List Price × Single Equivalent Discount Rate =
= $15,000 × .388 = $5,820
© McGraw Hill
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Finding List Price
The list price can be calculated when the net price and a single or chain discount
are known.
2 steps
1. Find the percent paid by multiplying the complements of each trade together.
2. Using R × B = P, solve for B.
R = complement, P = net price, B = list price
Example:
Your retail business, Fish R Us, purchased some fish tanks and miscellaneous
equipment for a net price of $5,500 with 20% trade discount. What was the list
price?
Complement:
100%
− 20%
80%
© McGraw Hill
.8 × B = $5,500
B=
5,500
= $6,875 – list price
.8
16
Calculating Trade Discount to Match a
Competitor’s Price
2 steps
1. Use the formula:
Trade discount × List price = Net price
where trade discount equals the complement of the known trade discount, D.
Solve for D.
2. Take the complement of D to find the discount that must be added to the
known trade discount.
Example:
Suppose you are the marketing manager for a car radio distributor. If you currently
offer 15% trade discount for a radio with list price of $225, what additional trade
discount must you offer to match a competitor’s net price of $145?
Complement of
15% trade
discount:
100% − 15% = 85% or .85
(.85 ´ D ) ´ $225 = $145
$191.25 ´ D = $145
$145
D=
= .76 or 76%
$191.25
Additional trade discount: 100% − 76% = 24%
© McGraw Hill
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Summary of Net Price and Trade Discount
Amounts
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18
Cash Discounts
1
• A cash discount is a discount for prompt payment.
• It cannot be taken on freight, returned goods, sales tax, or trade
discounts.
Credit Period
Mar. 1
Mar. 31
Time period sellers give buyers to pay invoices.
Discount Period
Mar. 1
Mar. 10
Time period buyer must take advantage of cash
discount.
© McGraw Hill
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Invoice
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20
Cash Discounts
2
The amount determined on the invoice is the terms of sale. This can include the
credit period, cash discount, discount period and freight term.
Buyers can often benefit from buying on credit. The time period that sellers give
buyers to pay their invoices is the credit period.
• Buyers can sell the good bought during this credit period. At the end of the
credit period, buyers can pay sellers with the funds from the sales from the
goods.
Sellers can offer a cash discount or reduction from the invoice price, if buyers
pay the invoice within a specified time. This time is called a discount period.
• Buyers who are not short on cash like cash discounts because the goods will
cost them less and as a result provide opportunity for larger profits.
Sellers usually give credit for 30, 60 or 90 days.
You must count the credit days from the date of the invoice, because not all
months have 30 days.
© McGraw Hill
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Common Credit Terms Offered by Sellers
1
There are 3 common credit terms that sellers use to offer
cash discounts to buyers:
1. Ordinary Dating Terms.
2. Receipt of Goods (ROG).
3. End of Month (EOM).
© McGraw Hill
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Common Credit Terms Offered by Sellers
2
Ordinary Dating Terms.
• Gives the buyer a cash discount period that begins with the invoice date.
• The cash period begins when the buyer receives the goods, not the invoice
date.
Receipt of Goods (ROG).
• Industry often uses the ROG terms when buyers cannot expect delivery until a
long time after they place the order.
• Buyers can take a 3% discount within 10 days AFTER receipt of good. Then
the full amount is due between day 11 and day 30 is cash discount period is
missed.
End of Month (EOM).
• If an invoice is dated the 25th or earlier of a month we follow one set of rules.
• If an invoice is dated after the 25th of the month, a new set of rules is followed.
© McGraw Hill
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Ordinary Dating Method
1
2/10, n/30 is read: “two ten, net thirty.”
• 2% cash discount off the gross amount of the invoice if the
buyer pays the bill within 10 days of the invoice date.
• If the buyer misses the discount period – then they submit
the net amount without a discount, between day 11 and 30.
© McGraw Hill
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Ordinary Dating Method
2
Example:
$400 invoice dated July 5; terms 2/10, n/30; paid on July 11, no freight.
$400 × .02 = $8 cash discount
$400 − $8 = $392 paid
or
$400 × .98 = $392
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Receipt of Goods (ROG)
1
3/10, n/30 ROG – is read: “three ten, net thirty receipt of
goods.”
• Cash discount period begins when the buyer receives the
goods, NOT invoice date.
• 3% cash discount off the gross amount of the invoice if the
buyer pays the bill within 10 days after the receipt of
goods.
• If the buyer misses the discount period – then they submit
the net amount without a discount, between day 11 and 30
after the receipt of goods.
© McGraw Hill
26
Receipt of Goods (ROG)
2
Example:
$900 invoice dated May 9, no freight or returned goods; the goods were
received on July 8; terms 3/10, n/30 ROG; paid on July 20.
Since the invoice was paid on July 20th, which is outside of the 10 day
discount period, no cash discount is offered.
Buyer pays net or full amount = $900
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27
End of Month (EOM)
1
1/10 EO M– is read: “one ten, end of month.”
Invoice dated 25th or earlier in the month:
• 1% discount, up until the 10th of the following month.
• If discount period is missed, buyer pays full amount within
20 days after the end of the discount period.
Invoice dated after the 25th of the month:
• Buyer gains an additional month.
• 1% discount, up until the 10th day of the second month.
• If discount period is missed, buyer pays full amount within
20 days after the end of the discount period.
© McGraw Hill
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End of Month (EOM)
2
Example:
$600 invoice dated July 6; no freight or returns; terms 1/10 EOM; paid on August
8. Note: Invoice dated on or before the 25th of the month.
*1% discount, up until the 10th of the following month.
$600 × .01 = $6
$600 − $6 = $594
or
$600 × .99 = $594
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29
End of Month (EOM)
3
Example:
$800 invoice dated April 29; no freight or returned goods; terms 2/10 EOM;
payment made on June 18. Note: Invoice dated after the 25th of the month.
* If a buyer bought goods on August 29, September 10 would be only 12 days. So
the buyer gets the extra month.
No discount because it was paid after the discount period; $800 paid.
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30
Partial Payments
Example:
Molly McGrady owed $400. Molly’s terms were 2/10, n/30. Within 10 days
Molly sent in a payment of $80. How much is her new balance?
© McGraw Hill
100% − 2% = .98
Step 1. Find the complement of
discount rate.
$80
1
.02
=
= $81.63
(
)
.98
Step 2. Divide partial payment by
the complement (amount
credited).
$400 − $81.63 = $318.37
Step 3. Subtract amount credited
from the amount owed
(outstanding balance).
31
Textbook Problem 11-1
Problem Statement:
Complete the following. LU 11-1(4)
Item
List
Price
Chain
Discount
Net Price
Equivalent
Rate (in
decimals)
Single
Equivalent
Discount Rate
(in decimals)
Trade
Discount
Net
Price
Apple
iPad
$799
3/1
.9603
.0397
?
?
Solution:
1.00
1.00
− .03
− .01
.96 ×
.99
= .9603 × $799 = $767.38
1.0000
− .9603
.0397 × $799 = $31.72
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© McGraw Hill
32
Textbook Problem 11-4
Problem Statement:
Complete the following. LU 11-1(4)
Item
List Price
Chain
Discount
Net Price
Trade
Discount
$3,000
9/4
?
?
Onewheel GT
Solution:
.8736 = .91 × .96
$3,000 × .8736 = $2,620.80
1 − .8736 = .1264
$3,000 × .1264 = $379.20
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33
Textbook Problem 11-15
Problem Statement:
Complete the following. LU 11-2(1)
Gross Amount of
Invoice (freight
charge already
included)
Freight
Charge
Date of
Invoice
Terms of
Invoice
Date of
Payment
Cash
Discount
Net Paid
$7,000
$100
4/8
2/10, n/60
4/15
?
?
Solution:
.02 × $6,900 = $138
$6,900 × .98 = $6,762
$6,762 + 100 = $6,862
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© McGraw Hill
34
Textbook Problem 11-19
Problem Statement:
Complete the following. LU 11-2(2)
Amount
of Invoice
Terms
Invoice
Date
$700
2/10, n/60
5/6
Actual
Partial
Payment
Made
Date of
Partial
Payment
$400
5/15
Amount of
Payment to
be
Balance
Credited
Outstanding
?
?
Solution:
$400
=
.98
$700.00
− 408.16
$291.84
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© McGraw Hill
35
Because learning changes everything.
®
www.mheducation.com
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Because learning changes everything.®
Chapter 18
The Cost of Home Ownership
Math for Business and Finance: an Algebraic Approach, 3rd Edition
Jeffrey Slater
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Learning Unit Objectives
LU 18-1: Types of Mortgages and the Monthly Mortgage
Payment
1. List the types of mortgages available.
2. Utilize an amortization chart to compute monthly
mortgage payments.
3. Calculate the total cost of interest over the life of a
mortgage.
LU 18-2: Amortization Schedule — Breaking Down the
Monthly Payment
1. Calculate and identify the interest and principal portion of
each monthly payment.
2. Prepare an amortization schedule.
© McGraw Hill
2
Subprime loans
Subprime loan was the root of so many foreclosures in the
past few years.
This type of loan allowed buyers to have a very low interest
rate- sometimes 0 rate
This helped customers qualify for expensive homes that
would not otherwise have qualified for.
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© McGraw Hill
18-3
Purchasing a home usually involves paying a large amount
of interest.
Depending on how interest rates are moving when you
purchase a home, you may find one type of mortgage to be
the most advantageous.
Reverse mortgages: senior homeowners borrow against the
equity of their property, often getting fixed monthly checks.
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© McGraw Hill
18-4
Types of Mortgages
1
Loan types
Advantages
Disadvantages
30-year fixed-rate
mortgage
A predictable monthly payment.
If interest rates fall, you are locked
into higher rate unless you refinance.
(Application and appraisal fees along
with other closing costs will result.)
15-year fixed-rate
mortgage
Interest rate lower than 30-year fixed
(usually ¼ to ½ of a percent). Your equity
builds up faster while interest costs are cut
by more than one-half.
A larger down payment is needed.
Monthly payment will be higher.
Graduatedpayment
mortgage (GPM)
Easier to qualify for than 30- or 15-year
fixed rate. Monthly payments start low and
increase over time.
May have higher APR than fixed or
variable rates.
Biweekly
mortgage
Shortens term loan; saves substantial
amount of interest; 26 biweekly payments
per year. Builds equity twice as fast.
Not good for those not seeking an
early loan payoff. Extra payments per
year.
Adjustable rate
mortgage (ARM)
Lower rate than fixed. If rates fall, could be
adjusted down without refinancing. Caps
available that limit how high rate could go
for each adjustment period over term of
loan.
Monthly payment could rise if interest
rates rise. Riskier than fixed-rate
mortgage in which monthly payment
is stable.
© McGraw Hill
5
Types of Mortgages
2
Loan types
Advantages
Disadvantages
Home equity loan
Cheap and reliable accessible lines of
credit backed by equity in your home. Taxdeductible. Rates can be locked in.
Reverse mortgages may be available to
those 62 or older.
Could lose home if not paid
(foreclosure). No annual or interest
caps.
Interest-only
mortgage
Borrowers pay interest but no principal in
the early years (5 to 15) of the loan.
Early years build up no equity.
Reverse mortgage;
(HESM) Home
Equity Conversion
Mortgage
Borrowers over 62 years of age with equity
in their home have no payments until the
house is sold or their demise;
disbursement options are available.
Low loan amounts, fees are high,
interest is accumulated, loans are
complicated, family homes may be
lost due to survivors’ inability to repay.
© McGraw Hill
6
Reverse Mortgage
Have you heard that elderly people who are house-rich and
cash-poor can use their home to get cash or monthly
income?
The Federal Housing Administration makes it possible for
older homeowners to take out a reverse mortgage on their
homes.
Under reverse mortgages, senior homeowners borrow
against the equity in their property, often getting fixed
monthly checks.
The debt is repaid only when the homeowners or their estate
sells the home.
© McGraw Hill
7
Computing Monthly Payment by Using an
Amortization Table
3 Steps
1. Divide the amount of the mortgage by $1,000. Remember
to first subtract the amount of the down payment from the
sale price of the home.
2. Look up the rate and the term in the amortization chart. At
the intersection is the table factor.
3. Multiply Step 1 by the factor in Step 2.
© McGraw Hill
8
Amortization Chart (Figure 18.1)
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© McGraw Hill
9
Calculating the Monthly Payment for
Principal and Interest
1
Example:
Gary bought a home for $200,000. He made a 20% down payment. The 5%
mortgage is for 30 years (30 × 12 = 360 payments). What are Gary’s monthly
payment and total cost of interest?
Solution:
Step 1. Divide the amount of the mortgage by $1,000.
Amount of mortgage = $200,000 × .80 = $160,000
$160,000
= $160
$1,000
Step 2. Look up the rate (5%) and the term (30 years) in the amortization chart
(Table 18.1). At the intersection is the table factor.
$5.36822
Step 3. Multiply Step 1 by the factor in Step 2.
Monthly payment = $160 × $5.36822 = $858.92
© McGraw Hill
10
Calculating the Monthly Payment for
Principal and Interest
2
Solution (continued):
Total Interest = Total of All Monthly Payments − Amount of Mortgage
Total of all monthly payments = $858.91 × 12 × 30 = $309,207.60
Total interest = $309,211 − $160,000 = $149,207.60
© McGraw Hill
11
Calculating the Monthly Payment Using
Formula
PMT =
PV (i )
1
1N
(1 + i )
Periodic (monthly interest rate (i): 5/12 = .4166667% or .00
$160,000 (.004166667 )
PMT =
= $858.91
1
1360
1
+
.004166667
(
)
© McGraw Hill
12
Computing the Monthly Payment
for Principal and Interest on excel
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© McGraw Hill
18-13
WHAT IS THE TOTAL COST OF
INTEREST?
Total cost of interest = Total of all monthly payments − Amount of mortgage
$149,207.60 = $309,207.60 − $160,000
($ 858.91× 360)
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© McGraw Hill
18-14
Computing Total Monthly Payment: PITI
(Principal, Interest, Taxes, Insurance)
1
4 Steps
1. Calculate the principal and interest as described above.
2. Determine 1 12 of the annual property tax.
3. Determine 1 12 of the annual homeowner’s insurance.
4. Add Steps 1, Step 2, and Step 3 together to get monthly P
ITI.
Lenders typically require your PITI to not exceed 28% of your
gross income. And your debt-to-income ratio should not be
greater than 36%.
© McGraw Hill
15
Computing Total Monthly Payment: PITI
(Principal, Interest, Taxes, Insurance)
2
Example:
Gary’s monthly principal and insurance payment is
$1,288.00. His annual property tax is $2,345. His annual
homeowner’s insurance is $1,578. What is Gary’s monthly PI
TI payment?
Solution:
Monthly PITI = $1288 + ($2,345 + $1,578)/12
Monthly PITI = $1288+$326.92 = $1614.92
© McGraw Hill
16
Effect of Interest Rates on Monthly
Payments (Table 18.2)
Table 18.2 Effect of interest rates on monthly payments.
Monthly payment
Total cost of
interest
5%
7%
Difference
$858.91
$1,064.48
$205.57
$149,207.60
$223,212.80
$74,005.20
($858.91 ×
360)−$160,000
© McGraw Hill
($1,064.48 × 360) − ($205.57×360)−$160
$160,000
,000
17
30 year mortgage at 5%
Albert bought a home for $550,000. He made a 20% down payment. The 5% mortgage
is for 30 years (30 × 12 = 360 payments). What are Albert’s monthly payment and total
cost of interest?
1. Set up your excel. *create a column or row with Rate (R), NPER (number of periods)
PV (loan) and Payment (PMT). Make sure you have all the correct numbers in each
corresponding cell
* You can write your interest rate in decimal or as a percent. If you use percent, make
sure you add the percent sign. If you use a decimal point, make sure you convert it
correctly.
2. Rate is divided by 12
3. Make sure you subtract any down payment from the loan.
4. Enter =PMT and click on the corresponding cells
© McGraw Hill
18
© McGraw Hill
19
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
© McGraw Hill
18-20
The Effect of Loan Types on Monthly
Payments
Compare the effect on the monthly payment and the total interest of
selecting a 15-year versus a 30-year term for Gary’s mortgage loan of
$160,000. The 15-year monthly payment is $1,624.00 and the 30-year
monthly payment is $1,288.00.
Monthly
Payment
Calculations
Total cost of
interest
15-year
$1,624.00
($1,624.00 × 180) − $160,000 =
$132,320
30-year
$1,288.00
($1,288.00 × 360) − $160,000 =
$303,680
Differences:
$ 336.00
© McGraw Hill
($171,360)
21
Hidden Cost in Purchasing a Home
Closing Costs – When property passes from seller to buyer, closing costs may
include fees for credit reports, recording costs, lawyer’s fees,
points, title search, and so on. A point is a one-time charge that
is a percent of the mortgage.
Escrow Amount – A special interest bearing account in which the buyer is required
to deposit 1 12 of the insurance cost and 1 12 of the real
estate taxes each month.
Repairs and Maintenance – The cost of keeping the property up.
Includes: paint, wallpaper, landscaping, etc
etera
PMI Insurance (Private Mortgage Insurance) – required if you do not have 20%
down payment. As soon as you reach 20% equity, you must petition to have PMI
removed.
© McGraw Hill
22
Calculating Interest, Principal, and New
Balance of Monthly Payment
1
Calculate the interest, principal and new balance for the first two months of Gary’s
mortgage. He financed $160,000 5% for 30 years (30 × 12 = 360 payments).
1st Month
Step 1. Calculate the interest for a month (use current principal):
Interest = Principal × Rate × Time
$666.67 = $160,000 ´ .05 ´1 12
Step 2. Calculate the amount used to reduce the principal:
Principal reduction = Monthly payment − Interest (Step 1)
$192.24 = $858.91 − $666.67
Step 3. Calculate the new principal:
Current principal − Reduction of principal (Step 2) = New principal
$160,000 − $192.24 = $159,807.76
© McGraw Hill
23
Calculating Interest, Principal, and New
Balance of Monthly Payment
2
2nd Month
Step 1. Interest = Principal × Rate × Time
$665.87 = $159,807.76 ´ .05 ´ 1 12
Step 2. Principal reduction = Monthly payment − Interest (Step 1)
$193.04 = $858.91 – $665.87
Step 3. Current principal − Reduction of principal (Step 2) = New
principal
$159,807.76 – $193.04 = $159,614.72 New principal
© McGraw Hill
24
Computing the Monthly Payment
for Principal and Interest on excel
Gary bought a home for $200,000. He made a 20% down payment. The 9%
mortgage is for 30 years (30 × 12 = 360 payments). What are Gary’s monthly
payment and total cost of interest (by financial calculator)?
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
© McGraw Hill
18-25
WHAT IS THE TOTAL COST OF
INTEREST?
Total cost of interest = Total of all monthly payments − Amount of mortgage
$303,464 = $463,464 − $160,000
($1,287.40 × 360)
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
© McGraw Hill
18-26
Effect of Interest Rates on Monthly
Payments (Table 18.1)
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
© McGraw Hill
18-27
Calculating Interest, Principal, and New
Balance of Monthly Payment
Gary bought a home for $200,000. He made a 20% down payment. The 9% mortgage is
for 30 years (30 × 12 = 360 payments). Let’s determine what portion of Gary’s first
monthly payment reduces the principal and what portion the interest.
Step 1. Calculate the interest for a month (use current principal):
Principal ×
Rate × Time = interest
$160,000 × .09 × 1/12 = $1,200
Step 2. Calculate the amount used to reduce the principal:
Monthly payment − Interest (Step 1)= Principal reduction
$1,200
Step 3.$1,287.40
Calculate the −new principal:
= $87.40
Current principal − Reduction of principal (Step 2) = New
principal
$160,000
−
$87.40
=
$159,912.60
Copyright © 2019
McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
© McGraw Hill
18-28
Calculating Interest, Principal, and
New Balance of Monthly Payment (continued)
2nd Month
Step 1. Interest = Principal × Rate × Time
$159,912.60 × .09 × 1/12 = $1,199.34 interest
Step 2. Principal reduction = Monthly payment − Interest (Step 1)
$1,287.40 − $1,199.34 = $88.06 principal reduction
Step 3. Current principal − Reduction of principal (Step 2) = New principal
$159,912.60
−
$88.06
=
$159,824.54 new principal
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
© McGraw Hill
18-29
Partial Amortization Schedule
(Table 18.2)
This shows the breakdown of Gary’s monthly payment.
– You can see the amount that does towards reducing the principal and toward
payment of actual interest.
– After 7 months, Gary still owes $159,374.25
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
© McGraw Hill
18-30
Calculate your mortgage payment
1. Set up your excel. *create a column or row with Rate (R), NPER (number of periods) PV
(loan) and Payment (PMT). Make sure you have all the correct numbers in each
corresponding cell
* You can write your interest rate in decimal or as a percent. If you use percent, make sure
you add the percent sign. If you use a decimal point, make sure you convert it correctly.
2. Rate is divided by 12
3. Make sure you subtract any down payment from the loan.
4. Enter =PMT and click on the corresponding cells
© McGraw Hill
31
Gus bought a home for $320,000. He gave a 50% down payment. The 8%
mortgage is for 30 years (30 × 12 = 360 payments).
© McGraw Hill
32
Calculate simple interest
1. Set up your excel sheet:
*create a column or row with principal (P), interest rate (R), Time (T) and Simple
Interest. Make sure you have all the correct numbers in each corresponding cell
• You can write your interest rate in decimal or as a percent. If you use percent,
make sure you add the percent sign. If you use a decimal point, make sure you
convert it correctly.
• Time is 1/12
Enter the formula for simple interest in the cell B4. You can manually enter the
cells or click on the cells.
© McGraw Hill
33
© McGraw Hill
34
find the principal reduction: you subtract Simple interest from the mortgage payment.
© McGraw Hill
35
calculate the New principal. Subtract the principal reduction from the principal
© McGraw Hill
36
© McGraw Hill
37
Textbook Problem 18-1
Problem Statement:
Complete the following amortization chart by using Table 18.1: LU 18-1(2)
Selling
Price of
Home
Down
Payment
Principal
(loan)
Rate of
Interest
Years
Monthly
Mortgage
Payment
$140,000
$10,000
$130,000
3½%
25
?
Solution:
$130,000
= 130
$1,000
or
130 × $5.00624 = $650.81 Monthly mortgage payment
$130,000(.00291667)
PMT =
= $650.81
1
1300
1
+
.00291667
(
)
Access the text alternative for slide images
© McGraw Hill
38
Textbook Problem 18-2
Problem Statement:
Complete the following amortization chart by using Table 18.1: LU 18-1(2)
Selling
Price of
Home5
Down
Payment
Principal
(loan)
Rate of
Interest
Years
Monthly
Mortgage
Payment
$90,000
$5,000
$85,000
5½%
30
?
Solution:
$85,000
= 85
$1,000
or
PMT =
85 × $5.67789 = $482.62 Monthly mortgage payment
$130,000(.004583333)
= $482.62
1
1300
(1 + .004583333)
Access the text alternative for slide images
© McGraw Hill
39
Textbook Problem 18-11
Problem Statement:
Joe Levi bought a home in Arlington, Texas, for $140,000. He put down 20% and
obtained a mortgage for 30 years at 5 1 2 %. What is Joe’s monthly payment?
What is the total interest cost of the loan? LU 18-1(2, 3)
Solution:
$140,000 × .20 = $28,000 Down payment
$140,000 − $28,000 = $112,000 Principal (loan)
$112,000
= 112
$1,000
112 × $5.67789 = $635.92 Monthly mortgage payment
$635.92 × 12 × 30 = $228,931.20
$228,931.20 − $112,000 = $116,931.20 Total interest
© McGraw Hill
40
Textbook Problem 18-12
Problem Statement:
If in Problem 18–11 the rate of interest is 7 1 2 %, what is the difference in interest
cost? LU 18-1(3)
Solution:
$140,000 × .20 = $28,000 Down payment
$112,000
= 112
$1,000
112 × $6.99215 = $783.12 Monthly mortgage payment
$783.12 × 360 = $281,923.49
$281,923.20 − $112,000 = $169,923.20 Total interest
$169,923.20 − $116,931.20 = $52,992.00 Difference in interest cost
© McGraw Hill
41
Textbook Problem 18-14
1
Problem Statement:
Harriet Marcus is concerned about the financing of a home. She saw a small
cottage that sells for $50,000. If she puts 20% down, what will her monthly
payment be at (a) 25 years, 6 1 2 %, (b) 25 years, 6%; (c) 25 years, 5 1 2 %;
(d) 25 years, 5%? What is the total cost of interest over the cost of the loan for
each assumption? (e) What is the savings in interest cost between 5% and
6 1 2 %? (f) If Harriet uses 30 years instead of 25 for both 6 1 2 % and 5%, what is the
difference in interest? LU 18-1(2, 3)
(a) 25 years, 6 1 2 %
Solution:
$40,000
= 40
$1,000
40 × $6.75207 (Table 18-1) = $270.08 Monthly payment
$270.08 × 12 × 25 = $81,024
$81,024 − $40,000 = $41,024 Total interest
© McGraw Hill
42
Textbook Problem 18-14
2
Problem Statement:
Harriet Marcus is concerned about the financing of a home. She saw a small
cottage that sells for $50,000. If she puts 20% down, what will her monthly
payment be at (a) 25 years, 6 1 2 %, (b) 25 years, 6%; (c) 25 years, 5 1 2 %;
(d) 25 years, 5%? What is the total cost of interest over the cost of the loan for
each assumption? (e) What is the savings in interest cost between 5% and
6 1 2 %? (f) If Harriet uses 30 years instead of 25 for both 6 1 2 % and 5%, what is the
difference in interest? LU 18-1(2, 3)
(b) 25 years, 6%
Solution:
$40,000
= 40
$1,000
40 × $6.44301 (Table 18-1) = $257.72 Monthly payment
$270.72 × 12 × 25 = $77,316
$77,316 − $40,000 = $37,316 Total interest
© McGraw Hill
43
Textbook Problem 18-14
3
Problem Statement:
Harriet Marcus is concerned about the financing of a home. She saw a small
cottage that sells for $50,000. If she puts 20% down, what will her monthly
payment be at (a) 25 years, 6 1 2 %, (b) 25 years, 6%; (c) 25 years, 5 1 2 %;
(d) 25 years, 5%? What is the total cost of interest over the cost of the loan for
each assumption? (e) What is the savings in interest cost between 5% and
6 1 2 %? (f) If Harriet uses 30 years instead of 25 for both 6 1 2 % and 5%, what is the
difference in interest? LU 18-1(2, 3)
(c) 25 years, 5 1 2 %
Solution:
$40,000
= 40
$1,000
40 × $6.14087 (Table 18-1) = $245.63 Monthly payment
$245.63 × 12 × 25 = $73,689
$73,689 − $40,000 = $33,689 Total interest
© McGraw Hill
44
Textbook Problem 18-14
4
Problem Statement:
Harriet Marcus is concerned about the financing of a home. She saw a small
cottage that sells for $50,000. If she puts 20% down, what will her monthly
payment be at (a) 25 years, 6 1 2 %, (b) 25 years, 6%; (c) 25 years, 5 1 2 %;
(d) 25 years, 5%? What is the total cost of interest over the cost of the loan for
each assumption? (e) What is the savings in interest cost between 5% and
6 1 2 %? (f) If Harriet uses 30 years instead of 25 for both 6 1 2 % and 5%, what is the
difference in interest? LU 18-1(2, 3)
(d) 25 years, 5%
Solution:
$40,000
= 40
$1,000
40 × $5.84590 (Table 18-1) = $233.84 Monthly payment
$233.84 × 12 × 25 = $70,152
$70,152 − $40,000 = $30,152 Total interest
© McGraw Hill
45
Textbook Problem 18-14
5
Problem Statement:
Harriet Marcus is concerned about the financing of a home. She saw a small
cottage that sells for $50,000. If she puts 20% down, what will her monthly
payment be at (a) 25 years, 6 1 2 %, (b) 25 years, 6%; (c) 25 years, 5 1 2 %;
(d) 25 years, 5%? What is the total cost of interest over the cost of the loan for
each assumption? (e) What is the savings in interest cost between 5% and
6 1 2 %? (f) If Harriet uses 30 years instead of 25 for both 6 1 2 % and 5%, what is the
difference in interest? LU 18-1(2, 3)
(e) What is the savings in interest cost between 5% and 6 1 2 %?
Solution:
5%: $233.84 ×12 × 25 = $70,152
6 1 2 % : $270.08 ×12 × 25 = $81,024
$81,024 − $70,152 = $10,872 Saving in interest
© McGraw Hill
46
Textbook Problem 18-14
6
Problem Statement:
Harriet Marcus is concerned about the financing of a home. She saw a small cottage that sells
for $50,000. If she puts 20% down, what will her monthly payment be at (a) 25 years,
6 1 2 %, (b) 25 years, 6%; (c) 25 years, 5 1 2 %; (d) 25 years, 5%? What is the total cost of
interest over the cost of the loan for each assumption? (e) What is the savings in interest cost
between 5% and 6 1 2 % ? (f) If Harriet uses 30 years instead of 25 for both 6 1 2 % and 5%,
what is the difference in interest? LU 18-1(2, 3)
(f) If Harriet uses 30 years instead of 25 for both 6½% and 5%, what is the difference in
interest?
Solution:
6 12 % :
$40,000
= 40 40 ´ $6,32068 (Table 18-1) =$252.83
$1,000
$252.83 × 12 × 30 = $91,018.80
$40,000
5% :
= 40 40 ´ $5.36882 (Table 18-1) =$214.73
$1,000
$214.73 ×12 × 30 = $77,302.80
$91,018.80 − $77,302.80 = $13,716 Difference in interest
© McGraw Hill
47
Because learning changes everything.
®
www.mheducation.com
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Because learning changes everything.®
Chapter 21
Stocks, Bonds, and Mutual Funds
Math for Business and Finance: an Algebraic
Approach, 3rd Edition
Jeffrey Slater
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Learning Unit Objectives
LU 21-1: Stocks and Cryptocurrency.
1. Read, calculate, and explain stock quotations.
2. Calculate dividends of preferred and common stocks; calculate return
on investment.
3. Explain cryptocurrency.
LU 21-2: Bonds.
1. Read, calculate, and explain bond quotations.
2. Compare bond yields to bond premiums and discounts.
LU 21-3: Mutual Funds
1. Explain and calculate net asset and mutual fund commissions.
2. Read and explain mutual fund quotations.
LU 21-4: Distribution of Profits and Losses in a Partnership.
1. Calculate distribution of profits (losses) using five methods.
© McGraw Hill
2
Stocks
Stock –shares of ownership in a company.
Common stock – stock that allows owners to have voting rights.
Preferred stock – does not allow voting rights, but gives preference over
common stockholders in dividends.
Cumulative preferred stock –entitles its owners to a specific amount of
dividends in 1 year.
Dividends – payments to shareholders from profit.
Dividends in arrears -payments owed to cumulative preferred
shareholders.
Stockholders Elect Board of Directors
Board of DirectorsElect Officers of Corporation
© McGraw Hill
3
Basic Stock Terms
• Companies sells shares of ownership in their company to raise money to finance
operations.
• The ownership shares are called stocks.
• The buyers of the stock are stockholders who receive stock certificates verifying
the number of shares of stock they own.
• Two basic types of stock are common stock and a preferred stock.
• Common stockholders have voting rights and preferred stockholders do not
have voting rights, but they receive preference over common stockholders in
dividends (payments from profit) and the company’s assets if the company
goes bankrupt.
• The company pays no dividends to common stockholders until the company
brings the preferred dividend payments up to date.
• Cumulative preferred stock entitles its owners to a specific amount of
dividends annually.
• Should the company fail to pay these dividends, the dividends in arrears
accumulate.
© McGraw Hill
4
General investor principles
1. know your risk tolerance and the risk of the investments you are
considering- whether you are a low-risk conservative investor or
high risk speculative investor
2. Know your time frame- how soon you need your money
3. know the liquidity of the investments you are considering- how
easy it is to get your money
4. know the return you can expect on your money-how much your
money should earn
5. do not put “all your eggs in on basket”- diversify with a mixture
of stocks, bonds and cash equivalents.
BEFORE YOU START ASKING OTHERS FOR FINANCIAL
ADVICE; DO YOUR RESEARCH AND OR MEET WITH A
PROFESSIONAL
© McGraw Hill
21
Why Buy Stock?
Some investors think the stock will become more valuable.
Other investors own stock to share in the profit distributed by
the company in dividends (cash or stock).
For various reasons, investors at different times want to sell
their stock or buy more stock:
• Strikes, inflation, or technological changes- may cause
some investors to think their stock will decline in
value. Some investors at this point decide to sell.
• Law of supply and demand takes over- the more people
want to sell, the stock price goes down. Should more
people want to buy the stock price goes up.
© McGraw Hill
6
WHY buy stocks?
Some investors want stock because they think the stock will
become more valuable.
Other investors own stock to share in the profit distribute by
the company in dividends (cash or stock)
For various reasons, investors at different times wan to sell
their stock or buy more stock.
strikes, inflation, or technological changes- may cause some
investors to think their stock will decline in value.
Some investors at this point decide to sell.
Law of supply and demand takes over- the more people want
to sell, the stock price goes down.
Should more people want to buy the stock price goes up.
© McGraw Hill
21
How Stocks Are Traded?
Stock exchanges – an orderly trading place for stock.
Stockbrokers – People who buy and sell stock on the floor of
the exchanges; they charge a commission for trading stocks.
Commission – Paid to stockbrokers for the buying and
selling of stock for investors.
Electronic trading – is growing each day.
© McGraw Hill
8
How to Read Stock Quotation
1
52 WEEKS HI
52 WEEKS
LO
STOCK
(SYM)
YLD %
PE
LAST
NET CHG
231.60
167.80
Hershey
(HSY)
1.74
26.67
207.69
−17.72
The newspaper lists the company name (Hershey) and the symbol
that Hershey uses for trading (HSY)
The highest price (HI) at which Hershey stock traded during the past 52
weeks was $231.60 per share. This means that during the year someone
was willing to pay $231.60 for a share of stock.
The lowest price (LO) at which Hershey stock traded during the year was
$167.80 per share.
© McGraw Hill
9
How to Read Stock Quotation
2
52 WEEKS HI
52 WEEKS
LO
STOCK
(SYM)
YLD %
PE
LAST
NET CHG
231.60
167.80
Hershey
(HSY)
1.74
26.67
207.69
−17.72
The stock yield percent (YLD) tells stockholders that the dividend per share is
returning a rate of 1.74% to investors. This 1.74% is based on the closing price.
Hershey declared a dividend of $3.61.
Annual dividend per share
Stock yield =
Today’s last price per share
$3.61
= 1.74%
$207.69
The price-earnings ratio (PE) measures the relationship between the closing price
per share of stock and the annual earnings per share.
Last price per share of stock
PE ratio =
Annual earning per share
$207.69
= 26.66
$7.79
Last price per share of stock
Price-earning ratio
$207.69
= $7.79
$26.67
Earning per share =
Earnings per share (EPS) are not listed on the stock quote.
© McGraw Hill
10
Effective long term strategy
If the last trade of the day was $91.49 per share. On the
previous day the closing price was $91.75
The price went down .26 from the previous day.
An effective long term strategy is to invest even if the stock
prices are falling.
As stock prices fall, you purchase more shares with the same
amount of money giving you additional future earning
potential.
© McGraw Hill
21
Dividends on Preferred and Common
Stock
Example: The stock records of Jason Corporation show the following:
Preferred stock issued:20,000 shares.
In 2023, Jason paid no dividends.
Preferred stock cumulative at $.80 per
share.
In 2024, Jason paid $512,000 in
dividends.
Common stock issued: 400,000 shares.
2023
Dividends paid
Preferred
stockholders
Common
stockholders
2024
2024
0
Paid: 0
$512,000
Paid for 2023:(20,000 shares
× $.80)
$16,000
Owe: Preferred, $16 ,000 (20,000
shares × $.80)
Paid for 2024:
+ 16,000
Total dividend:
$32,000
$512,000
0
Paid preferred for 2023 and
2024:
− 32,000
To common:
$480,000
$480,000
= $1.20 per share
400,000 shares
© McGraw Hill
12
Calculating Return on Investment
Example:
Suppose you bought 200 shares of Kraft Heinz Company stock at $39.09 and
sold them 1 year later at $41.10.With a 1% commission rate buying and selling
the stock and a current $1.21 dividend per share in effect, what was your return
on investment?
Solution:
Bought
Sold
200 shares at $39.09
$7,818.00
200 shares at $41.10
$8,220.00
Commission at 1%
+ 78.18
Commission at 1%
− 82.20
Total cost
$7,896.18
Total receipt
$8,137.80
Total cost
−7,896.18
Net Gain
$241.62
Dividends
+ 242.00 (200 × $1.21)
Total Gain
$483.62
© McGraw Hill
Total cost
$8,137.80
$ 483.62
= $6.12% rate of retrun
$7,896.18
13
Bonds
• When you own stock; you own a share of a company.
• When you own a bond, you are lending the company money like how banks lend money.
• Sometimes companies raise money by selling bonds instead of
stock; they may not want to sell more stock, so they sell bonds.
• Bonds represent a promise from a company to pay the face
amount of the bond owner at a future date, along with interest
payments at a started date.
• If company goes bankrupt, bondholders have the first claim to
the assets of the company before stockholders.
• Bonds are traded as stock; brokers also charge commissions on
bond trading; commissions vary.
© McGraw Hill
14
How to Read to Bonds Quotation
1
• Bond prices are stated in percents of face amount, not in
dollar amounts.
• Bonds are usually denominations of $1,000 (the face
amount).
• Bonds are sold below face value they are sold at a
discount.
• Bonds can sell at a premium – for more than its face value
of the bond interest is higher than the current market rate.
© McGraw Hill
15
How to Read to Bonds Quotation
2
Bonds
Current
Yield
Vol.
Close
Net change
Aflac 4 32
4.02%
214,587
99.50
−1
Note: Bond prices are stated as a percent of face amount
The interest on the bond is 4%. The company pays the interest semiannually. The
bond matures (comes due) in 2032. The total interest for the year is $40 (.04 ×
$1,000). The face value of the bond is $1,000
Yearly interest = Face value of bond × Stated yearly interest rate
$1,000×.04=$40.00
Current Yield =
Yearly interest
Cost of bond at closing
Yearly interest
$ 40.00
= 4.02%
$995.00
Access the text alternative for slide images
© McGraw Hill
.04 × $1,000
Current yield
.995 × $1,000
16
Calculating Bond Yields
Example:
Jim Smith bought 5 bonds of Aflac at the closing price of 99.50.What is
Jim’s interest? (Remember that in dollars 99.50 is $995.00.)
Solution:
Bond yield =
Total annual interest of bond
Cost of bond at closing
5 bonds × $40.00 interest per bond per year
$200.00
=
= 4.02%
5 × $995.00
$4,975.00
© McGraw Hill
17
Why Investors Choose Mutual Funds
• Diversification – you own a small portion of many different companies.
Protects you against the poor performance of a single company but not
against a sell-off in the market (stock and bond exchanges or
fluctuations in the interest rate).
• Professional management – you hire a professional to do it.
• Liquidity – most funds will buy back your fund shares whenever you
decide to sell.
• Low fund expenses competitions – forces funds to keep their
expenses low to maximize their performance. Since stocks and bonds
in a mutual fund represent thousands of shareholders, funds can trade
in large blocks, reducing transaction costs.
• Access to foreign markets – through mutual funds, investors can
conveniently and inexpensively invest in foreign markets.
© McGraw Hill
18
Mutual funds
Investing in a mutual fund means that you buy shares in the
fund’s portfolio (group of stocks and or bonds)
The value of your mutual fund share is expressed in the
share’s net asset value (NAV), which is the dollar value of
one mutual fund share
© McGraw Hill
21
Net Asset Value
Mutual fund – a portfolio of stocks and/or bonds
Net asset value (NAV) – the dollar value of one mutual fund share
Current market value of fund’s investment – Current liabilities
NAV =
Number of shares outstanding
• Helps investors track the value of their fund investment.
• After the market closes on each business day, the fund uses the
closing prices of the investments it owns to find the dollar value of one
fund share or NAV.
• This is the price investors receive if they sell fund shares on the day or
pay if they buy fund share on that day.
© McGraw Hill
20
Commissions: Mutual Funds
Classification
Commission charge
Offer price to buy
No-load (NL) fund
No sales charge
NAV (Buy directly from
investment company)
Low-load (LL) fund
3% or less
NAV + commission %
(Buy directly from
investment company or
from a broker)
Load fund
8½% or less
NAV + commission %
(Buy from a broker)
© McGraw Hill
21
How to Read a Mutual Fund Quotations
• Name of the fund.
• NAV plus the sales commission.
• Net Chg – Changes in NAV quotation
of the previous day.
• YTD % Ret – Fund return this year.
Access the text alternative for slide images
© McGraw Hill
22
Financial analysts recommend that individual retirement
accounts contain some mix of stocks and bonds
Retirement accounts should be heavily invested in stocks
while the investor is young
© McGraw Hill
21
Cryptocurrency
Cryptocurrency (Crypto) is a digital asset or virtual currency similar to
cash but without a regulating authority.
Cryptocurrency can be used in a manner similar to cash.
• to purchase goods and services,
• used to store value,
• used in computer networks.
Methods used to create units of cryptocurrency:
• Mining is one method, employing an energy-intensive process.
• Blockchain is the technology that supports cryptocurrency creating a
tamper-resistant digital ledger of transactions.
© McGraw Hill
24
Steps Purchasing Cryptocurrency
5 steps:
1. Choose where you want to purchase crypto from: Financial apps such
as PayPal and Venmo, Crypto exchanges such as Coinbase or
Kraken, trading apps such as Robinhood or Webull, traditional
brokers such as Trade Station or Interactive Brokers, or peer-to-peer.
2. Funding your account: Check to see if the following are accepted and
what the fees are:debit cards, bank transfers, credit cards, a digital
wallet.
3. Decide which of the more than 19,000 publicly traded
cryptocurrencies valued at over $1.3 trillion you want to purchase.
4. Place an order.
5. Secure your assets in a digital wallet. Decide where to store your
crypto private keys to protect from hacks and theft and to make
available for beneficiaries in the event of death.
© McGraw Hill
25
Pros of Investing in Stocks
Pros of investing in stocks:
• Proven historical record of approximately 10% long-term
returns.
• Ownership of part of a company.
• Simple to purchase.
• Regulated markets.
© McGraw Hill
26
Pros of Investing in Cryptocurrency
Pros of investing in cryptocurrency:
•
Considered by some to be digital gold and immune from inflation.
•
Viewed by some to be the currency of the future.
•
Used by communities that have been underserved by the traditional
financial system.
•
Potential for significant gains.
•
Diversified digital currencies available for purchase.
•
Unregulated market.
•
Expanding interest in digital currencies.
•
Can earn passive income through crypto-staking (locking out units
similar to the purchase of CD’s (Certificates of Deposit) for a specific
period of time).
•
Easy to buy.
© McGraw Hill
27
Cons of Investing in Stocks and
Cryptocurrency
Cons of investing in
stocks:
Cons of investing in
cryptocurrency:
• Market volatility.
• Intensely volatile, potential for
significant losses such as
during a crypto-crash
• Lower gains.
• Longer timeframe
required to witness
returns.
• No partial ownership in any
tangible asset
• Unregulated market
• Cybersecurity risks
• Regulatory risks
• Environmental impact of
mining.
© McGraw Hill
28
Textbook Problem 21-24
Problem Statement:
Whirlpool Corporation (WHR) earns $7.00 per share. Today the stock is
trading at $171.82. The company pays an annual dividend of
$6.99.Calculate (a) the price-earnings ratio (rounded to the nearest whole
number) and (b) the yield on the stock (to the nearest tenth percent). LU
21-1(1)
Solution:
a.
$59.25
= 12
$4.89
b.
$1.40
= 2.4% yield on the stock Yield: $6.99/$171.82=4.07%
$59.25
© McGraw Hill
price-earning ratio PE= $171.82/$7.00= 25
29
Textbook Problem 21-26
Problem Statement:
The following bond was quoted in The Wall Street Journal: LU 21-2(1)
Bonds
Current Yield
Vol.
Close
Net change
N J 4.125 35
3.5
5
96.875
+1 12
Five bonds were purchased yesterday, and five bonds were purchased today.
How much more did the five bonds cost today?
Solution:
Today: 5(.96875 × $1,000) = $4,843.75
Yesterday:
96.875
− 1.500
95.375
5(.95375 × 1,000) = $4,768.75
Change: $4,843.75 − $4,768.75 = $75.00
© McGraw Hill
30
Textbook Problem 21-28
Problem Statement:
Dairy Queen, as part of Warren Buffet’s Berkshire Hathaway (BRKA) with
6,400 locations in the USA, gave away free ice cream cones to celebrate
its 75th anniversary.If Warren Buffet has a bond bought at 105.25 at
4 ¾25, what is the current yield to the nearest percent?. LU 21-2(2)
Solution:
© McGraw Hill
1.0525 × $1,000 = $1,052.50
Bond Price
0475×$1,000 = $47.50
$47.50
= .0451 or 4.5%
$1, 052.50
Interest
Current yield
31
Textbook Problem 21-29
Problem Statement:
Abby Sane decided to buy corporate bonds instead of stock. She desired to have
the fixed-interest payments. She purchased 5 of 11 34 34 bonds of Meg
Corporation at 88.25. As the stockbroker for Abby (assume you charge her a $5
commission per bond), please provide her with the following: (a) the total cost of
the purchase, (b) total annual interest to be received, and (c) current yield (to
nearest tenth percent). LU 21-2(1)
Solution:
a.88 ¼% .8825
.8825 × $1,000 =
$ 882.50
×5
$4,412.50
Commissions:5 bonds × $5 per bond
+25
$4,437.50 Total Cost
b..1175 × $1,000
$117.50 × 5 = $587.50
c. $117.50
= 13.3%
$882.50
Current yield
Total annual interest
Access the text alternative for slide images
© McGraw Hill
32
Textbook Problem 21-31
Problem Statement:
Wall Street performs a sort of “financial alchemy” enabling the individual
to benefit from institutions lending money to them, according to Adam
Davidson, cofounder of NPR’s “Planet Money.” Individuals can invest
small amounts of their money in a 401(k), pooling their capital and
spreading the risk. If you invested in Fidelity New Millennium, FMILX, one
of the “10 Best Rated Funds” by The Street, how much would you pay for
80 shares if the 52-week high is $32.26, the 52-week low is $26.38, and
the NAV is $31.88? LU 21-3(1)
Solution:
$31.88 × 80 = $2,550.40
© McGraw Hill
33
Because learning changes everything.
®
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© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
QMB 3003 – Quantitative Business Applications:
IF YOU NEED MORE RESOURCES TO HELP ANSWER CORRECTLY, MESSAGE ME!
Discussion 11 Search Facebook or Instagram to find what customer discounts
companies offer Facebook or Instagram users. Make sure to talk about shipping
charges, and trade and cash discounts (if any). What kind of savings can you find?
Remember to reference. ( minimal 2 paragraphs – maximum 3 paragraphs )
USE THE CHAPTER 11 PDF FOR GUIDE TO HELP COMPLETE THIS ^
Discussion 18 Locate three mortgage options for a house you would like to buy and
calculate the payment and total interest for each. Which would you choose and why?
Choose concepts from the chapters to support your answer ( minimal 2 paragraphs maximum 4 paragraphs )
USE THE CHAPTER 18 PDF FOR GUIDE TO HELP COMPLETE THIS ^
Discussion 21 Determine what you would invest in today if you were building a
portfolio. Keep in mind your age, marital status, and the financial goals you want to
achieve. Use the concepts in this book to develop your strategies. ( minimal 2
paragraphs – maximum 3 paragraphs )
USE THE CHAPTER 21 PDF FOR GUIDE TO HELP COMPLETE THIS ^