Interpret Investment Returns - Securities Industry Essentials SIE

1. What is the total return if $P_0=\$40$, $P_1=\$44$, and dividend $D=\$1$ per share?

   $\frac{(44-40)+1}{40}=12.5\%$. Applies the holding period return formula by adding capital gain and dividend, then dividing by initial price.

2. What is the formula for total return over a period using ending value, beginning value, and income?

   $\text{Total return}=\frac{(\text{EV}-\text{BV})+\text{Income}}{\text{BV}}$. Captures both capital appreciation and income generated relative to the initial investment value.

3. What is the capital gains yield if a stock rises from $20 to $22 with no dividends?

   $\frac{22-20}{20}=10\%$. Computes the percentage price appreciation over the period without considering dividends.

4. Identify the date on which a buyer becomes entitled to the next declared dividend on a stock trade.

   The record date (shareholders of record receive it). Dividends are distributed to those listed as owners on the company's books as of this date.

5. Which option states who receives the dividend if a stock is purchased on the ex-dividend date?

   The seller (buyer is not entitled). Purchases on or after the ex-dividend date do not entitle the buyer to the upcoming dividend.

6. What is the dividend yield if annual dividends are $2 and the stock price is $50?

   $\frac{2}{50}=4\%$. Divides the annual dividend payment by the current stock price to determine the yield.

7. What is the formula for total return expressed as income yield plus capital gains yield?

   $\text{Total return}=\text{Income yield}+\text{Capital gains yield}$. Decomposes overall performance into returns from income and from price appreciation or depreciation.

8. What is the total return if income yield is $3\%$ and capital gains yield is $-5\%$?

   $3\%+(-5\%)=-2\%$. Sums the positive income yield and negative capital gains yield to find net performance.

9. Identify what a stock split does to shares outstanding and par value per share, all else equal.

   Shares increase; par value per share decreases proportionally. A stock split multiplies outstanding shares and adjusts par value to maintain total equity value.

10. What is the formula for holding period return when you receive one dividend during the period?

    $\text{HPR}=\frac{(P_1-P_0)+D}{P_0}$. Incorporates both the price change and the single dividend received during the holding period relative to initial price.

11. What is the income yield for a stock if $D=\$1.20$ and $P_0=\$30$ for the period?

    $\frac{1.20}{30}=4\%$. Divides the dividend received by the initial stock price to isolate the income component of return.

12. What is the expected price adjustment on the ex-dividend date for a regular cash dividend, all else equal?

    Stock price drops by approximately the dividend amount. Adjusts for the value distributed to shareholders, reducing the stock's market price accordingly.

13. What is the current yield of a $6\%$ bond with $\$1{,}000$ par if it trades at $900?

    $\frac{60}{900}=6.67\%$. Calculates current yield using the annual coupon interest divided by the discounted market price.

14. Identify the two components of common stock total return for a holding period.

    Dividend income and capital gain or loss. Combines periodic cash flows from dividends with the change in market value over the holding period.

15. What is the formula for dividend yield using annual dividends per share and market price per share?

    $\text{Dividend yield}=\frac{\text{Annual DPS}}{\text{Market price per share}}$. Represents the annual dividend income as a percentage of the stock's current market price.

16. What is the formula for capital gains yield using price change and beginning price?

    $\text{Capital gains yield}=\frac{P_1-P_0}{P_0}$. Measures the percentage change in asset price over the period, excluding any income.

17. What is the formula for nominal yield (coupon rate) on a bond using annual interest and par value?

    $\text{Coupon rate}=\frac{\text{Annual interest}}{\text{Par value}}$. Defines the fixed interest rate as a percentage of the bond's face value.

18. If a $10\%$ stock dividend is paid, how many new shares are received on a $200$-share position?

    $200\times 0.10=20$ new shares. Issues new shares equal to 10% of the current holding as a non-cash dividend.

19. What is the formula for current yield on a bond using annual interest and market price?

    $\text{Current yield}=\frac{\text{Annual interest}}{\text{Market price}}$. Expresses the bond's annual coupon payment as a percentage of its current market value.

20. What is the current yield of a $5\%$ bond with $\$1{,}000$ par if it trades at $\$1{,}100$?

    $\frac{50}{1100}=4.55\%$. Determines current yield by dividing annual coupon interest by the premium market price.

21. After a $2$-for-$1$ split, how many shares does an investor have if they owned $100$ shares before?

    $100\times 2=200$ shares. Distributes one additional share for each existing share in a 2-for-1 split.

22. Which option describes the relationship between bond price and yield: when price rises, yield does what?

    Yield falls (inverse relationship). Bond prices and yields move inversely due to the fixed nature of coupon payments.

23. What is the annual interest payment on a $7\%$ bond with $\$1{,}000$ par value?

    $0.07\times 1000=\$70$ per year. Multiplies the coupon rate by the par value to find the fixed annual interest payment.

24. What happens to the share price after a $2$-for-$1$ stock split, all else equal?

    Price is cut in half. Doubles shares outstanding, halving the price per share to preserve total market value.

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