Lesson 4: Capital Market Instruments

👨🏽‍🏫 Introduction

Have you heard terms like “shares,” “dividends,” or “bonds” before? These are examples of capital market instruments — tools used by companies and governments to raise money from investors.

This lesson explains what shares and bonds are, how to calculate dividends, interest, and yield, and how investors can evaluate returns on investments.

By the end of this lesson, you will be able to:

• Identify types of capital market instruments
• Calculate dividend income and yield from shares
• Calculate interest and yield from bonds

🧠 Key Concepts and Explanations

📊 1. Capital Market Instruments

These are long-term financial assets traded on the capital market. Common instruments include:

• Shares: Ownership units in a company. Shareholders may earn dividends.
• Bonds: Loans given to a company or government by investors. The issuer pays back interest over time.
• Debentures: Similar to bonds, but issued specifically by companies.

💵 2. Shares and Dividends

When you own shares, the company may pay you a portion of its profit called a dividend.

Dividend Income is calculated using this formula:

Yield is the return on investment based on the current (market) price of a share.

Formula for yield:

🏛️ 3. Bonds and Interest

Bonds pay fixed interest (called coupon) to bondholders every year.

Formula for annual interest:

To find the actual return if the bond is sold at a different price (market price), we use the yield formula:

🧮 Sample Problem Walkthroughs

1. A person owns 200 shares of nominal value ₦1.00. The dividend rate is 8%. Find the total dividend received.
   
2. If the market price per share is ₦2.00, find the yield.
   
3. A bond has face value ₦1,000 and pays 10% interest annually. Find the annual interest.
   
4. If the bond sells for ₦900, find its yield.
   

✍🏽 Practice Exercises

🅰️ A. Shares and Dividends

1. Kofi owns 300 shares with a nominal value of ₦2.00 each. The dividend rate is 6%. Calculate the dividend received.
2. If the market price per share is ₦3.00, calculate the yield.

🅱️ B. Bonds and Interest

1. A government bond with face value ₦5,000 pays 7% interest annually. What is the yearly interest?
2. If the bond is sold for ₦4,500, calculate its yield.

✅ Answers and Explanations

🅰️ A. Shares and Dividends

• A1:
  
• A2:
  

🅱️ B. Bonds and Interest

• B1:
  
• B2:
  

📌 Recap

• ✅ Shares pay dividends based on nominal value and declared rate
• ✅ Yield tells you your actual return based on the market price
• ✅ Bonds pay fixed interest (coupon), and yield also depends on the market price
• ✅ Investors use yield to compare options across the capital market

💭 Reflection Prompt

If you had ₦20,000 to invest, would you choose shares with a 5% dividend or a bond with 9% interest? Which one gives you a better yield? Which one is riskier?