Question

How to read stock and bond prices? how do you evaluate stock dividends, bond prices, and ROI of mutual funds.

Answer 1

How to read bond & stock prices:

A bond quote is the price at which a bond is trading. It is usually expressed as a percentage of par values. The price that is someone willing to pay for the bond is given in relation to 100 (par value).

Bond quotes are usually seen as a percentage of bond face or dollar value. Corporate bonds are quoted in 1/8^th increments. While government bonds are quoted in 1/32nds. Municipal bonds can be quoted in dollar or yield to maturity basis.

• As a percentage of face value – for example if bonds are selling at 950, that means it is selling at 95% face value and hence would be quoted at 95.
• By their yield: the 2 year us treasury jumped 10 basis to 2.12% yield means bond being traded jumped 10 basis points. So an increase in yield means price of bond dropped.

How to read stock quotes:

To read the stock quotes, we generally have the following elements whether online or newspapers.

• Company name & symbol.
• High / low – high indicates rising prices & similarly low for falling prices.
• Closing price indicates the level of change in the stock price at the end of the day.
• Dividend details will indicate the share of profits available to the shareholders.
• Stock price is the price paid by the investor to buy the share of a company.
• The close or the closing price reflects the last price at which the company’s stock is traded during the market hours & represents the previous day’s closing prices.

How to evaluate stock dividends:

Stock dividends are evaluated on the following basis:

• Dividend yield – this will help in knowing how much percentage you can expect to be paid per year on the original investment. But this is considered to be least important for the investors.
• Dividend growth – inflation can affect the results of dividend yield. For this reason, we can look at the history by two ways: first if the company is increasing its dividend consistently & how rapidly does the dividend grow.
• Payout ratio – this will let the investors know how much share of the company’s profits get paid and this is usually expressed as a percentage. A low payout indicates that the company’s dividend is safe even if the company’s revenue drops.

How to evaluate bond prices:

The fair value of the bond is present value of stream of cash flows. Hence the value of the bond is obtained by discounting the bond’s cash flows to the present using a suitable discount rate. Practically this discount rate is arrived at with reference to other instruments provided they exist. Various yield related measures are calculated for the given price.

ROI of mutual funds:

Compound average annual returns:

The compound average annual returns quoted in mutual fund brochures & advertisements will show the total a fund has returned, considering all capital gains & dividends expressed as an average yearly growth percentage.

The compound average annual return is an important evaluation tool as it shows the rate at which the wealth grows over a period of time.