Value Measurements

Value Measurements

The value of any asset (stock, bond, business, or other) is a function of the cash inflows and outflows, discounted at an appropriate rate that an investor can reasonably expect it to generate during its remaining life.

Bonds

Bond values are easiest to measure.

Standard bonds bear a designated interest rate and a set maturity date.

The combination defines expected cash flows and appropriate discount rate.

Stocks

Common stocks have no such coupon, and their life is perpetual.

An analyst thus must estimate both components (expected cash flows and discount rate) of the valuation exercise.


Another crucial difference is that qualitative variables such as managerial probity and skill have a direct bearing on common stock values, but a limited effect on bond values.


Also read:
Valuation
1. Value Measurements
2. Hunting for good investment prospects
3. What data most reliably indicate value