Reference no: EM132460199

Questions: Please discuss how the Bond Valuation differs from the Stock Valuation. Be sure to identify and explain the differences of Bond Valuation and Stock Valuation. Thanks

The explanation of bond valuation and stock valuation:

1. When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically called bonds.
2. A share of common stock is more difficult to value in practice than a bond for at least three reasons. First, with common stock, not even the promised cash flows are known in advance. Second, the life of the investment is essentially forever because common stock has no maturity. Third, there is no way to easily observe the rate of return that the market requires. Nonetheless, as we will see, there are cases in which we can come up with the present value of the future cash flows for a share of stock and thus determine its value.