Similarities Between Stocks And Bonds
The first differences between the two securities are the seniority in which they are liquidated. Bonds and preferred stock take precedence over common stocks, however bonds take precedence over all securities. In addition to that, preferred stocks are rated two notches below bonds when it comes to risk, due to the lower claim on company assets. When considering the risk of bonds, preferred stocks provide a higher yield to compensate for the risk. Lastly, preferred stocks have a lower par value than bonds, which require lower …show more content…
Preferred stocks are value by dividing the periodic dividend by the required return of preferred stocks. For example, if an investor requires a 10.5% return, and the stock pays an annual end of year dividend of $1.00, the market price per share would be equal to $9.52. Common stock are value by dividing the dividend paid at the end of the year by 1 plus the required return of stockholders added to the price at the end of year 1 divided by 1 plus the required return of stockholders; this will provide you with the present value of the expected cash flow. Alternatively, bonds are valuated by estimated the expected cash flow, determining the appropriate interest rate, and then calculating the present value of the expected cash flow. The cash flows are then added together to provide the value of the security bond.
Stock and bond securities, are yielded differently. First bonds can be yielded nominally and currently. In order to calculate the nominal yield of a bond, you have to divide the amount of interest paid b the face value of the bond. In order to calculate the currently yield of a bond; you have to divide the amount of interest it pays by the current market price of the bond. The calculation of stock yield is very simple; this is calculated by dividing annual dividends per share by price per