Stocks and bonds are two important types of investments in the financial world.
Stocks
represent ownership in a company, while bonds represent a loan made to a company or
government. This module will help you understand how they work and guide you through basic
mathematical problems related to them. By the end of the module, you’ll have a clear idea of
how stocks and bonds are different and how to calculate their values.
What are Stocks?
Definition: A stock is a share in the ownership of a company. When you own a stock, you own a
part of the company, known as a share.
Key Terms:
Shareholder: A person who owns stock in a company.
Dividends: Payments made by a company to its shareholders, usually from profits.
Market Price: The price at which a stock is bought or sold in the stock market.
Stock Example:
Imagine you buy 10 shares of a company, and each share costs $50. Your total investment is 10
shares × $50 = $500.
What are Bonds?
Definition: A bond is like a loan. When you buy a bond, you are lending money to a company or
government in exchange for periodic interest payments and the return of the bond’s face value
when it matures.
Key Terms:
Principal (Face Value): The amount of money you lend when buying a bond.
Coupon: The interest payments made to the bondholder.
Maturity Date: The date when the bond's principal is paid back.
Bond Example:
You purchase a bond for $1,000 with a 5% annual interest rate. You will receive 5% of $1,000
($50) every year until the bond matures.
Comparing Stocks and Bonds
Key Differences:
Ownership vs. Loan: Stocks represent ownership in a company, while bonds are loans made to
a company or government.
Risk: Stocks tend to be riskier because their value can go up or down based on the company’s
performance. Bonds are generally safer because they provide fixed interest payments.
Returns: Stocks can provide higher returns through capital gains (if the stock price increases)
and dividends, while bonds provide fixed interest payments.
Example:
If you invest in stocks, you might earn money through dividends and an increase in the stock’s
price. If you invest in bonds, you will earn money through interest payments and get your initial
investment back when the bond matures.
Activity 1
Instructions: Read each problem carefully and find what is asked in a 1 whole sheet of paper.
1. Suppose you bought 20 shares of a company at $30 per share. After one year, the company
pays a dividend of $2 per share, and the stock price rises to $35 per share.
Questions:
a) How much did you pay to buy the 20 shares?
b) What is the total amount of dividends you received?
c) What is the value of your shares after the stock price increased to $35?
2. You bought a 5-year bond with a face value of $1,000 that pays an annual interest rate of 6%.
Questions:
a) How much will you receive in interest payments each year?
b) How much total interest will you receive over 5 years?
c) How much money will you get back when the bond matures?
Assessment:
Test I. True or False:
Instructions: For each statement, write True if the statement is correct and False if it is
incorrect. The answers are provided below.
1. Stocks represent ownership in a company.
2. Bonds are a type of loan that investors give to companies or governments.
3. Dividends are interest payments made to bondholders.
4. Bonds tend to be riskier than stocks because their prices fluctuate more.
5. The price of a stock can increase or decrease based on how well the company performs.
6. When you buy a bond, you become a part-owner of the company.
7. Stocks have a fixed interest payment, while bonds can pay dividends.
8. A bond's maturity date is when the company must pay back the bond's face value.
9. Stockholders are guaranteed a fixed amount of income every year.
10. Investing in bonds usually involves less risk than investing in stocks.
Test II. Problem Solving.
Suppose you buy 50 shares of a company at $40 per share. After one year, the stock price
increases to $50, and you receive $1.50 per share as a dividend.
How much did you pay for the shares?
What is the total value of the shares after the price increase?
How much did you earn from dividends?
