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Strategies & Market Trends : Value Investing

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To: bruwin who wrote (61260)	9/3/2018 2:54:10 PM
From: scipio_caelestis	Read Replies (1) of 78774

I guess I can add another book to my to-do list... Concerning the Equity Bond Ratio, I had to look it up on Investopedia. There it is presented as a qualitative measure of the attractiveness of stock versus government bonds. In other words, the ratio is not used to approximate the fair value of the stock. You said: "(...) because that answer is dependent on the "interest rate" one uses (...)".Indeed the discount rate does greatly influence the value ultimately calculated for the stock. I heard that for this discount rate the risk free rate is used (10 YR Treasuries in the USA) as well as the weighted average cost of capital. However, for the calculation you made also some estimation of the yield of (long-term corporate) bonds had to be made. I do not know how long "long-term" is but does this not also bring the same problem as with the discounted calculations, i.e. what rate to pick? Does the corporate bond need to be of the same "quality" as the stock, and how can I determine this "quality"? Aren't long-term bonds more susceptible to changes in interest rates and doesn't this cause a large change in the calculated fair value of the AAPL stock within a short period of time (e.g. after a FED rate change) while intrinsic value, ideally, should not change that rapidly in time?

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