Asked by Marlene Mejia on May 17, 2024
Verified
The cash flows that come from investing in stocks and bonds appear similar in that they both consist of a stream of relatively small payments followed by a single larger payment. The smaller payments are dividends for stocks and interest for bonds, while the larger ones are the eventual selling price of stock and the return of principal for a bond. Critically evaluate this apparent similarity
Cash Flows
The sum of funds flowing in and out of a company, particularly influencing its ability to cover short-term obligations.
Selling Price
The cost at which a service or item is sold to purchasers.
- Conduct a critical analysis of the similarities and differences in cash flow production from investments in stocks compared to bonds.
Verified Answer
SY
Serena YoungMay 22, 2024
Final Answer :
The similarity between the cash flows from stocks and bonds is superficial. It does not really extend beyond the general pattern of a series of small payments followed by a single large receipt. The main difference is predictability. The interest and principal payments that come from a bond are quite reliable in that they are contractually specified. A stock's dividends and selling price, on the other hand, are very hard to forecast. Dividends can be changed or omitted entirely by the company's board of directors. Similarly, a stock's eventual selling price depends on financial and operating performance as well as the condition of the stock market at the time of sale. Both of these are subject to unpredictable changes. Further, a bond's interest payments are all equal and therefore form an annuity. Dividends are rarely so regular. Indeed, investors hope that the will rise over time.
Learning Objectives
- Conduct a critical analysis of the similarities and differences in cash flow production from investments in stocks compared to bonds.
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