Question

What are the two main sources of cash flows for a stockholder? How reliably can these cash flows be estimated? Compare the problem of estimating stock cash flows to the problem of estimating bond cash flows. Which security would you predict to be more volatile?

Short answer

The challenge of calculating stock cash flows is greater than that of estimating bond cash flows. The stock price fluctuates in response to market movements. As a result, the stock market is more volatile.

Step-by-step solution

Definition

A market where the companies are registered and issue the long term debt and securities to the public is known as the stock market. It is platform where the dealers and customers of securities meet and exchange securities

Explanation

The two main sources of cash flows for the stockholders are dividends on shares and the values of shares at the time of scale. The value of dividends gradually changes as per the change of market. The sales price of a stock depends on the dividend and the charge in the dividend affects the sales price also.

Due to the market uncertainties, the cash flows of shares change and affect the change in the market. Hence, the estimation of stock is difficult. On the bonds, the periodic interest is previously defined and the bondholders receive the fixed dividend in the duration of the bond. Hence, the problem in estimating the stock cash flows is more than the problem in estimating the bond cash flows. The price of the stock changes per changes in the market. Hence, the stock prices are more volatile.