Question

How are the Dividend Discount Model and the Value Bonds Model Similar?

Answer 1

Dividend Discount model:

In this model, present value of the stock is valued by discounting the future dividends receivable. Dividends are received based on the agreed rate of return. While discounting such dividends, the discount rate used will be required rate of return by the investor. Thus for valuing the stocks agreed rate of return and required rate of return are used for valuing the stock to its present value. In such valuation, present outflow is compared with such valued stock for investing decisions.

Value bonds model:

In this model, bonds are valued by aggregate of

a. discounting the coupon amounts(coupon rate x face value) received from such bonds during the bonds tenure with discount rate that most investors are currently receiving in the bond market and

+

b. discounting the bond amount received at the end of bond period to its present value.

Thus after a+b, such value is compared with present outflow for bond for investing decisions.