Please answer both questions 1.) Two investors are evaluating GE\'s stock for po
ID: 2741363 • Letter: P
Question
Please answer both questions
1.) Two investors are evaluating GE's stock for possible purchase. They agree on the expected value of next year's dividend and on the expected future dividend growth rate. Further, they agree on the riskiness of the stock. However, one investor normally holds stocks for two years, while the other holds stocks for 10 years. On the basis of the type of analysis done in Chapter 9, should they both be willing to pay the same price for GE's stock? Explain with your reasoning.
2.)Bond prices change whenever the market interest rate changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Is this statement true or false. Explain your answer by making up a "reasonable" example based on a 1-year and a 20-year bond to help answer the question.
Explanation / Answer
1) Yes, both will be willing to pay the same price for GE’s stock because the value of stock is the present value of its future expected dividend and in this case both of them expect the same future dividend growth and also agree the riskiness then they have to reach the comparable conclusion which is similar to the stock value.
2) The statement Bond prices change whenever the market interest rate changes is false statement. Because, the bonds which are available for the short period is less likely to vary. Generally 1 year bond will exist under the same going rate for the entire period. On the other hand long term bonds are more sensitive to the interest rate changes.