Question

Question) The value of a financial security can be calculated as:

Multiple choice answers) Please answer and Explain!

a) the opportunity cost of owning another security.

b) the sum of all income expected from a security.

c) the present value of the security's expected cash flows.

d) the future value of the income produced by the security.

Answer 1

Option c is correct.

It is the present value of all future cashflows that are discouned with a an appropriate rate.

Let me give an example, if I want to value a stock, I have to discount all the future expected dividends to present value. In the same way, I I want value a bond, I have to discount all the expected future coupon payments and in the same way, if I want to value a real estate property, I have to discount the future annual net operating income that generates from the property.