User Account

All Pages

What is the impact of interest rate cuts on bond prices

Assignment Help Financial Management
Reference no: EM131084835

FINANCE MANAGEMENT ASSIGNMENT: CASE STUDY - JOY RIDE BY NUMBERS

Fully discuss and answer the following questions and provide examples if applicable.

Question 1: What is the impact of interest rate cuts on bond prices?

Question 2: What is the relationship between interest rates and the cost of capital?

Question 3: What is the impact of cheaper borrowing on the firm's investment decision?

Question 4: What is the impact of lower interest rates on the firm's tax bill?

Question 5: What is the impact of the rate cut on one's retirement income?

Task

View the following links which contain videos and articles about interest rates.

Interests Rates and Housing Market in New Mexico

https://www.bing.com/videos/search?q=interest+rate+video&qpvt=interest+rate+video&mid=380261829435C3293E7F380261829435C3293E7F&FORM=LKVR3#

CNBC on outlook for investments for 2011

https://www.cnbc.com/id/15840232?play=1&video=1715766882

CNBC on interest rates and inflation

https://www.cnbc.com/id/15840232?play=1&video=1693678777

CBC video on impact of rising interest rates

https://www.cbc.ca/video/player.html?category=News&zone=money&site=cbc.money.ca&clipid=1548653196

Article on Rising Interest Rates

https://news.sympatico.cbc.ca/home/interest_rate_rise_effects_may_be_sharp_carney/dc2a2b5c

An interest rate cut might result in a major boost for the economy or might go unnoticed, depending on the circumstances. In theory, lower interest rates would entice the consumer to borrow more and spend more. Moreover, a lower interest rate would also make corporate borrowing cheaper. Cheaper borrowing should translate into firms taking on more investment projects, expanding and creating more jobs and income.

When interest rates are low, more investment opportunities become attractive (given that other things stay constant). This is true because the cost of capital tends to be lower and therefore the present value of various projects tends to be higher. In general, the time-value-of-money impact of an interest rate cut is this: the future value gets smaller, while the present value of cash flows gets larger. By contrast, an interest rate increase-one that usually occurs when the economy is heating up-will have the opposite impact. It would lower the present value and increase the future value of cash flows.

Just like corporations, in the wake of an interest rate cut, investors have to re-evaluate their objectives and strategy. Take for example the proverbial risk-averse investor who puts all of his or her money into a savings account with the local bank. With a lower interest rate, our investor is now contemplating a lower terminal value of his or her investment. At the same time, the family who saves for their children's education will now have to put aside a larger chunk of their income to meet the expected future cost of tuition and living expenses.

Resources

The following additional resources may help you.

Bank of Canada: https://www.bankofcanada.ca/en/monetary.htm

Mortgage Rates: https://www.rbcroyalbank.com/rates/mortgage.html

Financial Tools and Calculators: https://www.royalbank.ca/tools.html

Bond Price Calculator: https://www.investopedia.com/calculator/BondPrice.aspx

Reference no: EM131084835

Questions Cloud

Bacteria in serum in capsule staining : What is the purpose of emulsifying the bacteria in serum in capsule staining?
Professional development assignment description : There are 2 parts to the assignment. Note that part two is asking for six sources to be reviewed. Please place both assignments into one paper. The different questions should be clearly marked so your professor knows which question you are addres..
Facultative anaerobes and obligate anaerobes : What is the difference between facultative anaerobes and obligate anaerobes?
Reading of quality literature-desk research-module content : Use an examination of the views of expert academics and a sample of real world case studies to support a discussion of the role and importance of Professionalism and Professional Ethics in the Information Technology industry.
What is the impact of interest rate cuts on bond prices : What is the impact of interest rate cuts on bond prices? What is the relationship between interest rates and the cost of capital? What is the impact of cheaper borrowing on the firm's investment decision?
Determine the derivative of the function : Using the definition of the derivative, determine the derivative of the function f(x) = √(2x + 1), at x = 1. Suppose we know that f(x) is differentiable at x = a. For each of the following, determine if the statement is true or false. If true, expl..
Determine the transfer function and difference equation : Determine the transfer function and difference equation.
Contraction of the sarcomeres of muscle cells : What are some examples of movement produced by the contraction of the sarcomeres of muscle cells?
Result in the cessation of bleeding : Describe in detail the phenomena of hemostasis that result in the cessation of bleeding.

Reviews

Write a Review

Financial Management Questions & Answers

  How much is in the IRA when Bob retires

Bob makes his first $400 deposit into an IRA earning 8.1% compounded annually on his 24th birthday and his last $400 deposit on his 43rd birthday (20 equal deposits in all). With no additional deposits, the money in the IRA continues to earn 8.1% int..

  Calculate the best-case and worst-case

We are evaluating a project that costs $956,000, has a four-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,400 units per year. Suppose the projections giv..

  What is the estimated value of each share of stock

The PV of XYZ Corp.'s future operating free-cash flow is $500 million. It has debt outstanding of $30 million and cash and marketable securities of $10 million. It also owns an undeveloped tract of land recently appraised for $8 million. There are 5 ..

  Expected return and market risk premium

Stock Y has a beta of 1.20 and an expected return of 12.7 percent. Stock Z has a beta of .90 and an expected return of 11.1 percent. If the risk-free rate is 4.5 percent and the market risk premium is 7.1, are these stocks correctly priced?

  Cost of item if full amount had been paid at time of sale

The cost of an item if the full amount had been paid at the time of sale is called the:

  What would the risk-free rate have to be for the two stocks

Stock Y has a beta of 1.5 and an expected return of 15.7 percent. Stock Z has a beta of 0.7 and an expected return of 9 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

  Describe the concept of market efficiency

Describe the concept of market efficiency. In what sense is the concept an important part of the shareholders wealth maximization objective.

  Which security is considered more risky

Security A has a 9% expected return, 65% standard deviation. Security B has a 7% return, 50% standard deviation. Using standard deviation data alone, which security is considered more risky? You are looking at investing in SML Industries stock. Risk ..

  Determine the value of the bonds if the market interest rate

Cactus Construction sells $1,000,000 of 8% bonds on January 1, of the current year. The bonds are unsecured but registered to the name of the purchaser. The bonds are due in 5 years, with interest payable annually at year-end. Determine the value of ..

  Using valid peer-reviewed sources

Identify the various stakeholder groups of the Monsanto Company. Using valid peer-reviewed sources on the Internet, update any dated facts in this case with more current information. How do these new facts affect current stakeholders?

  Depreciated by the straight line method

Tocserp is considering the purchase of a new machine that will produce widgets. The widget maker will require an initial investment of $10,000 and has an economic life of five years and will be fully depreciated by the straight line method.

  Contribution to your individual retirement account

You have just made your first $4,500 contribution to your individual retirement account. Assume you earn a 11.30 percent rate of return and make no additional contributions. What will your account be worth when you retire in 39 years? What if you wai..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd