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Valuation of Bonds & Stocks

1. Distinguish between the types of bonds. What factors determine their value? Explain three important relationships that exist in bond valuation.

2. Distinguish between preferred stock and common stock. Compare valuing preferred stock and common stock.

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Question 1

The different types of bonds are:
• Senior bonds which are secured obligations because they're backed by property that acts as collateral, for example Mortgage bonds (secured by real estate), equipment trust certificates (backed by equipment, popular with railroads and airlines).
• Junior bonds which are backed only with a promise by the issuer to pay timely interest and principal.
• Debenture bonds are unsecured bonds issued as notes (2-10 yr maturity), no collateral.
• Treasury bonds—aka Treasuries or governments. They are backed by the full faith and credit of the US government. Treasury notes have 2, 3, 5 or 10 yr maturities while Treasury bonds have 30 yr maturities.
• TIPS--Treasure Inflation-Protected Security, is a Treasury inflation-indexed bond. The maturity is 5, 10, or 20 yrs.
• Agency and Mortgage-Backed Bonds—issued by political subdivisions of the US government.
• Municipal bonds are issued by states, counties, cities, school districts. These ...

Solution Summary

The solution answers the valuation of bonds and stocks in 589 words with four sources cited.