Question

how do we value money market securities, bonds and stocks? Do you think that this model (technique) makes sense? Limit your answer to 400 words.

We have devoted several chapters to this CLO. First, we focused on money market securities. Remember that money markets are short-term instruments, i.e. securities with a maturity of a maximum a year. These securities are Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker’s acceptances, and Eurodollars. We also examined capital markets. Capital markets are for securities with an initial maturity greater than one year. These securities include bonds, stocks, and mortgages. Your textbook defines stocks as follows: “A share of stock in a firm represents ownership. A stockholder owns a percentage interest in a firm, consistent with the percentage of outstanding stock held”. While bonds are described as: “Bonds are securities that represent a debt owed by the issuer to the investor. Bonds obligate the issuer to pay a specified amount at a given date, generally with periodic interest payments.” Keep these definitions in mind when you answer the question above.

Answer 1

How do you value stocks and bonds:.....

Stocks are shares in the ownership of a business and bonds are a form of debt that the issuing entity promises to repay at some point in the future. In other words we can say, stocks are riskier investment than bonds.

If the stock pays a dividend, the stock can be valued by calculating the rate of return. When we buy a bond it means that we are purchasing someones else debt. To get the best value, we want a high coupon rate, short time to maturity and to purchase when market interest rate are high. The theoritical fair value of bond is calculated by discounting the present value of its coupon payments by an appropriate discount rates. It takes into account price of a bond, par value,coupon rate and time of maturity.while calculating the bond value the investor will use the discount rate to determine the present value of the cash flows.

second part of answer:

Although bonds are considered safe, there are pitfalls like interest rates risk--- one of the primary risk associated with the bond market. Inflation risk occurs when the rate price increases in the economy deteiorates the returns associated with the bond. Dont buy bonds when the interest rates are low or rising. Put your cash in a money market fund or in certificates of deposit maturing in 3 to 9 months.Treasary bonds are the safest bond to buy.

Therefore we can say that bonds are safer than stocks.