Question

The price of a security is the… Group of answer choices a.) geometric average of all...

The price of a security is the…

Group of answer choices

a.) geometric average of all past prices.

b.) the future value of all current dividends.

c.) sum of all future profits.

d.) the present value of all future cash flows.

e.) the future value of all the future profits net of interest payments and taxes.

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Homework Answers

Answer #1

The price of a security is The Present Value of All Future Cash flows. @ Required Rate of Return.

How ? Let Us understand by example

Consider A Bond with Face Value INR 1000, Coupon Rate = 10% payable annually, Maturity = 5 Years, required rate of return i.e. Yield of similar bond in the market is 14%.

How can we find the price we are willing to pay today (t=0) ?

By discounting all the Future Coupon amount i.e. 100 INR each year for 5 years @ 14% and Plus INR 1000 at redemption of bond. Total we will get = 100*PVAF(14, 5) + 1000*PVIF(14, 5) = 343.31 + 519.37 = INR 862.68

Therefore Present value of 100 INR today from each year end and Present value of 1000 INR today from 5th Year End.

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