Question
In: Finance
When an investor buys a stock or bond, does the price he is willing to pay...
When an investor buys a stock or bond, does the price he is willing to pay depend on whether he intends to resell his investment in 2 years or in 30 years?
Why or why not?
Solutions
Expert Solution
ANSWER
YES,
the price an investor would be willing to pay would totally depend
upon the "tenure" he is going to hold his Investment
for.
EXPLANATION/JUSTIFICATION
- Whenever we purchase any product from the market , we first look at the benefits that we will get out of such product in the future and then decide its worth . If the price of such product is higher than its worth than we do not buy such product and vice-versa.
- Similarly above Concept applies in Stock Market as well. When an Investor wants to Invest into any Stock or Bond, he would first look at the future benefits that he will get from such stock in the form of Dividends and Redeemable Value/Resale value of such Bond/Stock at the time of exiting from such Investment.
- Accordingly he will be willing to pay only the actual worth of such Investment which will be the Present Value of all the Future Incomes that he would receive and the Resale Value at the time of Selling such Investment.
- So now if he would be holding an Investment for a shorter period of time (lets say 2 years) than the Future Incomes (ie. Dividends or Coupons) will get reduced to such period of 2 years only which will reduce the Fair Value of such Investment WHEREAS if the holding tenure is greater (lets say 30years) then it would Increases the Worth of such Investment as on today by the amount of such additional income discounted value.
- Hence in such a case (ie. when he is holding for 30 years) he might be willing to pay more than in otherwise case
- Also when the Holding Period of an Investment is higher, Risk Factor attached to such Investment also gets increased which again impacts the price that an Investor would pay for such Investment as such risk would reduce the amount.
- Such Risks can be Default Risk , Market Risk , Interest Rate Risks etc.
- Hence we can conclude that the "holding period" of an Investment is an important factor that will impact the price that an investor would pay for such investment.
jeff jeffy answered 1 year agoRelated Solutions
Bond Pricing: a. What price would you be willing to pay for a bond with $120...
Bond Pricing:
a. What price would you be willing to pay for a bond
with $120 annual coupon and that sells for 900 at the end of five
years
b. What is the current yield for that bond
An investor buys a collared stock. The current price of the stock is 200. The collar...
An investor buys a collared stock. The current price of the
stock is 200. The collar has strike prices 200 and 210 and is zero
cost. The collar expires in 6 months.
The stock pays a dividend of 1 every 3 months. The next dividend
is payable in 1 month.
The annual effective risk free interest rate is 4%.
Let S be the price of the stock at the end of 6 months.
Determine the range of S for which...
An investor buys a 5-year bond with a coupon rate of 6.5% at a price that...
An investor buys a 5-year bond with a coupon rate of 6.5% at a
price that reflects a yield to maturity of 10.9%. Interest is paid
semiannually. Exactly one year later, after receiving the second
coupon payment, the investor sells the bond for 97% of par value.
What was the investor’s rate of return on the bond investment for
the year? Enter your answer as a decimal out to four decimal
places. As an example, you would enter 1.146% as...
An investor buys a European call on a share for $5. The current stock price is...
An investor buys a European call on a share for $5. The current
stock price is $102 and the strike price is $100. (a) Under what
circumstances will the investor make a profit (have positive
profit) on the expiration date? (b) Under what circumstances will
the option be exercised on the expiration date? (c) Please draw a
diagram showing how the investor’s profit depends on the stock
price on the expiration date. To put it another, draw a diagram
showing...
When an investor purchases a share of a firm's common stock, what does he or she...
When an investor purchases a share of a firm's common stock,
what does he or she receive in return? (Select all that apply.)
Multiple select question.
A share in the company's future successes and setbacks
An ownership share in the firm
A guarantee of future dividends
A guaranteed constant increase in the market value of the
share
What does it mean when neoclassical economists say that discriminators are willing to pay to discriminate?
What does it mean when neoclassical economists say that
discriminators are willing to pay to discriminate?
An investor purchases a bond that does not pay a coupon (zero-coupon) with a face value...
An investor purchases a bond that does not pay a coupon
(zero-coupon) with a face value of $5,000. Assume the bond’s 8.4%
yield to maturity is expected to remain constant over the duration
of the bond’s life. What is the rate of return on his investment,
if he sells this bond ten years later?
Group of answer choices
Not enouh information to answer the question
4.20%
6.72%
5.04%
8.40%
An investor purchases a bond that does not pay a coupon (zero-coupon) with a face value...
An investor purchases a bond that does not pay a coupon
(zero-coupon) with a face value of $5,000. Assume the bond’s 8.4%
yield to maturity is expected to remain constant over the duration
of the bond’s life. What is the rate of return on his investment,
if he sells this bond ten years later?
4.20%
5.04%
8.40%
Not enough information to answer the question
6.72%
Why will a short-term and long-term investor with the same beliefs be willing to pay the...
Why will a short-term and long-term investor with the same
beliefs be willing to pay the same price for a stock?
An investor buys a share of stock for $40 at time t = 0, buys another...
An investor buys a share of stock for $40 at time t = 0, buys
another share of the same stock for $50 at t = 1, and sells both
shares for $60 each at t = 2. The stock paid a dividend of $1 per
share at t = 1 and at t = 2. The periodic money weighted rate of
return on the investment is closest to:
23.0%
22.2%
23.8%
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Write a c++ program to load two column of numbers, do arithmetic operations to the data...
- A forklift can be leased for $3000 per month, with maintenance and insurance included. Alternatively, the...
- Assume that I can borrow money at a rate of 10% per year, but that I...
- The newly elected president Susan implements some policies with the intention of boosting income. She succeeds...
- Multiple Production Department Factory Overhead Rates The total factory overhead for Urban Styles, Inc. is budgeted...
- using this code under, I want when the user input only letter q an error message...
- 1. Keeping in mind the various definitions of operating system, consider whether the operating system should...
ADVERTISEMENT