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http://courses.aplia.com/af/servlet/quiz?quiz action-takeQuiz&iqu; Aplia: Student QuestionChegg Study |Guided Solutio.. Interest rates affect corporate profits and security prices. Based on your understanding of the relationship betweer interest rates and corporate profits and security prices, identify which of the following statements is true and which is false Statements True False Interest rates affect the level of economic activity, which in turn affects the profits earned by a business organization, all other considerations remaining constant. Interest rates will affect the preference of investors to own stocks versus owning bonds A sharp decrease in interest rates will increase the price of bonds, which can significantly decrease the potential for capital gains and the yield earned by a bondholder. This should decrease the demand for bonds compared to the demand for stocks, all other considerations remaining constant. An increase in market interest rates will increase the opportunity cost of investors' funds and increase the price of financial assets To further examine the relationship between interest rates and the price of financial assets, consider the effect of a change in an investor's required return, or opportunity cost, on the price of a financial asset. Five years ago, Alejandro purchased a perpetuity that agrees to pay him and his heirs $300 per month forever. At the time of purchase, Alejandro was expecting to earn an annual return of 7.00%, but in the intervening years, the economy and the available investment alternatives have changed. In today's market, it is now reasonable to anticipate an annual return of 4.25% By how much would you expect the value of Alejandro's perpetuity to change from when he purchased it until today? O $2,773 O $33,276 O $84,705 O $51,429 Session Timeout 58:49 12:31 PM 4/8/2016

Explanation / Answer

Question-1-True

The interest rates affect the level of economic activity. That economic activity affcet the organizations profit. This will also affect the stock prices becuase it will affcted the profits of the firms.

Question-2- True

The change in the level of interest will affect the preferences to hold stock or bnds. When interest rates are lower people hold stocks than bonds and vice versa.

Question-3- True

Question-4- True

When interest rate swill increase then the opportunity will be increased

Part B

Perpetuity at 7.00%. Tha is calculated by,

300/0.07=4285

Perpetuity at 4.25%

300/0.0425=7058

The rate iof change is,

7058-4285=$2773

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