Describe the nature of a bond\" Include at least one of the following :term/matu

Question

Describe the nature of a bond"

Include at least one of the following :term/maturity, risk, face value, "buying" a bond, and conflict with stockholders.

"Discuss the accuracy of stock valuation, and compare it with that of bond valuation"

"Do stocks that don't pay dividends really have a "value" ? Why or why not ?

"What does the efficient market hypothesis say ? What are its implications for stock analysis ? "

Using a five year time frame, compare the stock performance of your favorite company with its nearest competitor and also with the S&P 500 ("the market") as well.

How has it performed per the other two (Note: that your answers should reflect a percentage gain or losses over the five year period) ? Provide a rationale as to why it has performed as well or whether it has over/under performed.

For your stock chart, you can use this link https://www.marketwatch.com/investing/stock/CLX/charts(I have chosen Clorox as my stock) : Clorox

In the left menu:

1) Change the symbol to your company's symbol.

2) Under "Time" , select Five years

3) Under "Compare ", for "Index" , choose "S&P 500"

4) Under "Compare", place your company's competitor's symbol in the box.

5) Click on the green box "Draw Chart" above.

You will then have a five year chart comparing your company's stock to its competitor and both to the S&P 500.

Right click to copy the chart and then "Control V" to place it into your discussion reply.

Explanation / Answer

Bond is a certificate of indebtness in which a investor loans money to an entity in return of a fixed or variable percentage of income and principal repayment at the end of maturity.

Types of bonds are redeemable bonds, non redeemable, participating, non participating, convertible bonds and non convertible bonds.

Maturity is the tenure of a bond that is the time time remaining to its maturity.

Face value of a bond is generally 1000, which is the nominal amount for a bond. They are offered on par, premium( above the face value), discount( below the face value).

Risks associated with bonds are:

1. Interest rate risk.

2. Reinvestment risk.

3. Inflation Risk.

4. Credit risks.

5. rating downgrade risks.

6. Liquidity risks.

Conflict with share holders: Debt instruments are paid on priority either the regular stream of income or at liquidation. Hence sometimes due to the limited cash available the shareholders suffer crunch.

Debt agreements often impose certain covenants that limit the wealth of shareholders.

Agency conflicts are common with shareholders and bondholders.

2. Stock valuation are done on the basis of expected growth rates and the expected dividends which are sometimes not certain due to economic environment. Because paying dividend is not a necessary obligation for company.

Therefore the stock valuation is a bit uncertain, it carries the risk of loss.

Bond valuation are more accurate as they are based on a fix stream of payments which are more certain than dividends.

3. Stocks that don't pay dividends such as Amazon have a growth component as the retained amount is invested in more profitable opportunities and hence increase shareholders wealth.

But some stocks like Under Armor are not paying dividends but they don't have growth component also. The dividend skip is due to financial constraints the company is facing due to poor performance results.

4. Efficient market Hypothesis suggests that the markets reflect any publicly announced information In their stock valuation. No investor or trader can supernormal profits in the long run. The market will reflect correction in the prices effectively and efficiently. Its implications for stock analysis are that the stock market is efficient and will reflect all the relevant public information.

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