Business Mathematics Chapter 3: Investment
Terms to Know:
Section 1: Reading the Stock Exchange Table
- The money you earn has two purposes (1) to spend on the present needs and wants and (2) to invest for future needs and wants.
- The principal is the amount spent on the stocks.
- Dividends are the portion of a profit.
- A fraction is a part of a whole object.
- The bottom number is the denominator, the top number is the numerator.
- The greatest common factor is the largest number that will divide evenly into both the numerator and the denominator.
- A prime number is a number that is divisible only by 1 and itself.
- A composite number that has other factors besides 1 and itself.
- The least common denominator is the smallest number that contains all of the denominators.
- An improper fraction occurs when the numerator is equal to or larger than the denominator.
Section 2: The Stock Market
- Invert means to turn the fraction upside down
Section 3: Buying and Selling Stock
- A stock certificate showing the number of shares that you own in a particular corporation.
- Licensed stockbrokers do the buying and selling of stock for you in a place called a stock exchange.
- The most familiar stock exchange is the New York Stock Exchange.
- Stocks are sold at the current market value which is the current selling price quoted in dollars per share.
- The decimal point separates the whole number and the decimal.
- Terminating decimals are fractions that divide out evenly.
- A repeating decimal does not come out even, but it has a pattern of repeating digits.
- Total selling price - Total purchase price = Capital gain
Stock Market Game
- To find the total purchase price, simply multiplying the price per share by the number of shares you are purchasing.
- A money market fund serves you like an interest-bearing checking account but yields higher than the average bank's checking account.
Section 4: Certificate of Deposit
- Simple Interest Formula: I = PRT
- To convert a percent to a decimal, drop the percent sign and move the decimal point two places to the left.
- Percent means per hundred.
Section 5: The Savings Account
- The FDIC (Federal Deposit Insurance Corporation) who protects your deposited money up to $100,000.
- Savings per week (Weeks in a year) = Yearly savings.
Section 6: Finding the Principal in a Savings Account
- The ending-balance method calculates your interest based on the balance (the amount of money in your account) in your savings account at the end of the interest period.
- The minimum-balance method calculates your interest based on the smallest balance that you had on any one day during the interest period even though you may have a larger balance at the end of the period.
- The daily-interest figures the interest between the daily transactions that you make.
Section 7: Real Estate
- When purchasing real estate as an investment, be aware of the condition and location of the house.
- After the house is purchased, there are utility expenses, property taxes, depreciation allowances, homeowners insurance, and repairs.
- The rate of income is the amount of return than you are actually receiving from your investment written as a percent.
- Annual Net Income = Rate of Income (Cash Investment)
- Annual Net Income = The annual rent - annual expenses
- The annual net income is the amount of annual rent that is left after the annual expense has been subtracted out.
- The cash investment is the money that you have invested in your real estate.
- The rate of income (the percent) can be found by dividing the annual net income (the percentage) by the cash investment (the whole).
- Monthly rent income (Months) = Annual rent income
- Annual rent income - Annual expenses - Annual net income
- Annual net income = Rate of Income (Cash Investment)
Section 8: Corporate Bonds
- The bondholder will receive the face value which is the amount printed on the bond.
- Par value is the bond's face value.
- Premium is more than the bond's face value.
- Discount is less than the bond's face value.
- The current selling price of a bond is the quoted price listed as a percent of the face value.
- Face value (Quoted Price) = Selling Price
- Face value (Bonds) = Total face value
- Total face value (Quoted Price) = Selling Price
- Face value (Interest rate) = Annual interest
- To find the annual yield for a bond, divide the annual interest by the selling price of the bond.
- Face value (Quoted price) = Selling Price
- Face value (Interest rate) = Interest
- The annual yield will be higher than the annual rate of interest if the bond sells at a discount.
- The annual yield will be lower than the annual rate of interest if the bond sells at a premium.
Section 9: Mutual Funds
- A mutual fund is an investment company that pools your money together with other investors' money and then spreads it out among several different stocks to get the best return for everyone's money.
- The investment portfolio is a list of corporations in which your mutual fund invests in.
- The prospectus is a pamphlet containing all of the details and information that you need to know before investing in a mutual fund.
Section 10: Compound Interest
- When interest is compounded, the interest is computed on the balance plus the interest earned the previous period.
- The compound interest formula can be used to find the amount of principal at a given rate of interest which is compounded for a given number of interest periods.
- If the interest is compounded annually, the rate must be expressed annually. If the interest is compounded quarterly, the rate must be expressed quarterly.
Section 11: Real Return on an Investment
- The two factors that decrease the real use of your money is inflation and taxes.
- The expected gross return is found by using the simple interest formula.
- The expected after-tax return is the expected gross return minus the income tax owed.
- The expected real return is the after-tax return minus the effect of inflation.
- Amount of investment (Rate of return) = Expected gross return
- Expected Gross Return (Marginal tax rate) = Taxes
- Expected Gross Return (Taxes on gross return) = Expected after-tax return