Investing Basic

Discount Rate

The discount rate is the interest rate you need to earn on a given amount of money today to end up with a given amount of money in the future. The discount rate accounts for the time value of money, which is the idea that a dollar today is worth more than a dollar tomorrow given that the dollar today has the capacity to earn interest.

Stock

Bond

Yield

Yield refers to the earnings generated and realized on an investment over a particular period of time.

• Yield includes price increases as well as any dividends paid, calculated as the - net realized return divided by the principal amount (i.e. amount invested).
• Higher yields are perceived to be an indicator of lower risk and higher income, - but a high yield may not always be a positive, such as the case of a rising - dividend yield due to a falling stock price.

The yield is the discount rate of the cash flows. Therefore, a bond's price reflects the value of the yield left within the bond.2

The higher the coupon total remaining, the higher the price. A bond with a yield of 2% likely has a lower price than a bond yielding 5%. The term of the bond further influences these effects.

Yield = Net Realized Return / Principal Amount

For example, the gains and return on stock investments can come in two forms. First, it can be in terms of price rise, where an investor purchases a stock at $100 per share and after a year they sell it for $120. Second, the stock may pay a dividend, say of $2 per share, during the year. The yield would be the appreciation in the share price plus any dividends paid, divided by the original price of the stock. The yield for the example would be:

($20 + $2) / $100 = 0.22, or 22%

At Par

The term at par means at face value. A bond, preferred stock, or other debt instruments may trade at par, below par, or above par. Its value then fluctuates based on prevailing interest rates and market demand. The owner of a bond will receive its par value at its maturity date.

Market sentiment

• Market sentiment refers to the overall consensus about a stock or the stock - market as a whole.
• Market sentiment is bullish when prices are rising.
• Market sentiment is bearish when prices are falling.
• Technical indicators can help investors measure market sentiment.

What Causes a Bond's Price to Rise?

When stocks are on the rise, investors generally move out of bonds and flock to the booming stock market. When the stock market corrects, as it inevitably does, or when severe economic problems ensue, investors seek the safety of bonds. As with any free-market economy, bond prices are affected by supply and demand.