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Homework answers / question archive / 1)Define risk as it relates to an investment? Briefly discuss how risk can be measured 2)Briefly discuss the difference between a share of common stock versus a share of preferred stock
1)Define risk as it relates to an investment? Briefly discuss how risk can be measured
2)Briefly discuss the difference between a share of common stock versus a share of preferred stock. What are the characteristics of each? What is meant by a call provision and what is a convertible stock?
3)What is a bond? Briefly discuss the difference between a coupon bond and a zero coupon bond. What are the characteristics of each? Define par value as it relates to a bond.
4)Briefly discuss the relationship between bond price and yield to maturity (interest rate).
5)Current forecasts are for ABC Company to pay annual cash dividends of $3.00, $0, and $6.50 per share over the next three years, respectively. At the end of three years, you expect to sell your share at a market price of $127. What should the price of a share today be with a 10% expected rate of return?
1) Risk is not about losses its about uncertainity. It is the probability or likelihood of occurrence of losses relative to the expected return on any particular investment. Risk can measured with different ways like standard deviation, beta, value at risk (VaR).
2) Main difference between common stock and preferred stock is as the name implies preferred stock gets preference during the time of payments like dividends and at the time of bankrupcy. Preferred stock has no voting privileges but common stock does have. Dividends are fixed in case of preferred stock but not in case of common stock it depends upon profitable. Common stock are riskier than preferred stock.
.characteristics of common stock :-
A call provision is a stipulation on the contract for a bond or other fixed-income instruments that allows the issuer to repurchase and retire the debt security. If the bond is called, investors are paid any accrued interest defined within the provision up to the date of recall.
Convertible Stock is a stock that include an option for the holder to convert the shares into a fixed number of common shares after a predetermined date.The value of a convertible stock is ultimately based on the performance of the common stock.
3) Bond is a fixed income security that represents a loan made by an investor to a borrower. It is less risky investment for investor as compared to common stock.
A coupon bond is a bond that pays a coupon at fixed interval of time on face value of the bond and face value at maturity. On the other hand Zero coupon bond bears no coupons but pays face value at the time of maturity. Zero coupon bond trades at a discount but coupon bond may trade discount but par as well as premium.
characteristics of coupon bond are:-
Fixed income instrument.
Pays coupons at regular intervals on face value.
Can trade on discount, premium, par value.
Riskiness is low.
characteristics of zero coupon bond are:-
Issued at deep discount and redeemed at full face value.
Pay tax on interest annually even though you don't receive it until maturity.
Zero coupon bonds or zeros don’t make regular interest payments like other bonds does.
Par value is face value of the bond. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bonds credit status.
4) Bond price and yield to maturity are negatively related. If yield to maturity increases bond price decreases and vice-versa.
5)PLEASE SEE THE ATTACHED FILE.