Question

Stock valuation and Bond Valuation
Bonds and stocks are two primary securities traded on approximately all stock exchanges of the
world because of its potential, reliability, and better trade volume. Besides all these pro, risk taking
behavior of different investors and the features associated with each class of security are vital ones
that attract investors for earning a handsome retum. Stocks are considered more risky with higher
retum, whereas bonds accounted low risk investment with guaranteed return. However, most
investors formulate a portfolio of their investment with combination of bonds and stocks for optimal
retum with a lesser degree of risk due to diversification edge involved in it.
The formulation of such portfolio lies upon market factors and company specific factors. The optimal
retum only can be achieved by better judgment of both factors and evaluation of intrinsic prices of
securities by some fundamental methods.
Required:
A new investor wants to add bonds and shares in his portfolio and he has two options available with
the following information.
1.
Company ABC issued a five-year bond with face value of Rs.1.000. The bond offers 12%
semiannual coupon payment. The market interest rate for such type of investment is 14% per
annum while current market price of bond is Rs.940.
II
The stock of company XYZ is being sold at Rs 54 per share while the forecasted dividend is
Rs.6 for first year and Rs. 7 for the second year. The price of the stock after year 2 is expected
to be Rs.55. The Company paid most recent dividend as Rs. 5 whereas the rate of retum for
such type of investment is 14% per annum.
valuation of both investment options by calculating:​

Answer 1

Answer:

Stock valuation and Bond Valuation Bonds and stocks are two primary securities traded on approximately all stock exchanges of the world because of its potential, reliability, and better trade volume. ... Stocks are considered more risky with higher return, whereas bonds accounted low risk investment with guaranteed return.

Step-by-step explanation: