Question

Question 1 The stock valuation method of income capitalización considers the stock price as the discounted value of future dividends at the risk adjusted required return of equity, for dividend paying firms. True or False?

Question 2 The main advantages of bonds to the investor seen in our subject were (Just name them):

Question 3 Mortgage bonds (or mortgage-backed securities) are bonds that have as an underlying security a mortgage on all properties of the issuing corporation.

Question 4 In the bond market investment decisions are made more on the bond’s yield than its price basis. There are three widely used measures of the yield one being the Current Yield. Please explain what is Current Yield about and its formula.

Answer 1

Question 1: True

Because, income capitalisation method of valuing stock price makes an assumption that the market price of a share/stock is the present value of its future dividends stream. Income capitalisation method of valuing stock price considers the expected future benefits like dividends, interest or other incomes. As per this approach the stock price is a function of return that shareholders expect and it relates the stock price to the present value of such benefits (or cash flows) and these cash flows are converted to present value based on risk adjusted rate of returns because the use of risk adjusted rate is based on the concept that the investors demands higher returns from risky projects. So if the cash flows are dividends then the present value of such cash flows/ benefits is the price of the stock/present value of stock.