The Mathematics of Money

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Learning Objectives

LO 1 Identify the key characteristics of different types

of investments, including stocks, bonds, futures

and options, and mutual funds.

LO 2 Correctly use technical terminology related to

various types of investments.

LO 3 Calculate values used to measure the fi nancial

results, including dividend rates, dividend yields,

compound annual growth rates, and total rates

of return.

LO 4 Recognize how investment concepts such as

risk, volatility, diversifi cation, and leverage

can affect investment choice and investment

performance.

LO 5 Assess a reasonable rate of return expectation

for an investment portfolio based on the types

of investments it contains.

Chapter Outline

6.1 Stocks

6.2 Bonds

6.3 Commodities, Options, and Futures Contracts

6.4 Mutual Funds and Investment Portfolios

Investments

6.1 Stocks

In our work so far, we have put a great deal of effort into the mathematics of money

invested growing over time. When money is put to work as a loan, this growth is due to

the payment of interest. We have also recognized, though, that there are other ways that

money can be put to work aside from simple notes and bank deposits. We have seen that

present and future values can be calculated in the same way regardless of whether the

“October: This is one of the peculiarly

dangerous months to speculate in stocks.

The others are July, January, September,

April, November, May, March, June,

December, August and February.”

—Mark Twain, “Pudd’nhead Wilson’s Calendar for 1894”

CHAPTER

6