Questions listed below

Question

1. The relationship between a bond's price and the yield to maturity is an inverse relationship. Please explain, but make sure you don't simply restate the inverse relationship, but explain the reasoning. Include three examples.
2. Why are stock valuation models dependent upon expected dividends, future dividend growth and an appropriate discount rate? Please be sure to include how we value any financial assets which will help dissect this answer.

Answer 1

1. A bond's interest payments are fixed. That is to say that the payouts are the stated interest percent times the face value of the bond. Both of these are stated on the physical bond. As the bond's value increases (costs more to buy the bond on the open market) the yield to maturity (as calculated by the interest payments divided by the market value of the bond) decreases.

Therefore, bond price up = yield to maturity down which is an inverse(opposite) relationship

"2. Stock values are determined by expected dividends and future dividend growth. The current stock value is discounted using an assumed discount rate ( a "guess" as to what future rates will be) . A higher dividend can be interpreted as a sign that investors value the stock and its future perfomence.