Final answer:
Investors might purchase interest-paying securities over dividend-paying stocks for greater income stability, lower risk, and preference for predictable returns. Interest from bonds is considered safer and prioritized over dividends in case of financial troubles. Present Discounted Value is easier to assess for interest payments due to their fixed nature, compared to the variable returns from stocks.
Step-by-step explanation:
Investors might choose to purchase interest-paying securities instead of dividend-paying stocks for several reasons related to the predictability of returns, investment goals, and risk tolerance. Interest-paying securities, like bonds, provide regular fixed income through interest payments, which are contractual obligations of the borrower and tend to be less volatile than stock dividends, which can fluctuate depending on the company's profitability.
From an investment standpoint, interest-paying securities might be attractive to those who seek a conservative income stream, such as retirees or those with a low risk tolerance. Moreover, the interest from bonds is often seen as safer than dividends since companies are legally bound to pay out interest to bondholders before distributing profits to shareholders as dividends. Additionally, if the company were to face financial trouble, bondholders are typically prioritized over stockholders in the hierarchy of payouts.
Stock investments, on the other hand, have the potential for both dividends and capital gains. However, stocks are generally considered riskier due to market volatility and the fact that dividend payments are not guaranteed. An investor might buy shares at one price with hopes of selling at a higher value later, capturing the capital gain, but the future stock price is uncertain. While dividends and increased stock value potentially offer higher returns, they also carry higher risk and less certainty compared to the predictable income from interest payments.
Applying Present Discounted Value (PDV) to these investments is key when assessing their worth. PDV helps investors to determine the current value of future cash flows, whether from bond interest payments or projected stock dividends and capital gains. Nonetheless, estimating PDV for stocks can be more complex due to the variable nature of dividends and stock prices. This is why some investors prefer the relative stability of interest payments when applying PDV to their investments.