Interest rates affect corporate profits and security prices. Based on your under

Question

Interest rates affect corporate profits and security prices. Based on your understanding of the relationship between interest rates and corporate profits and security prices, identify which of the following statements is true and which is false. 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? $84, 705 $2, 773 $33, 276 $51, 429

Explanation / Answer

a. True.
Interest rate would impact the preference of investors , when interest rates rise the price of both stocks and bonds fall down and Vice versa.
b. True
Interest rate affect the level of economic activity and economic activity affect the corporate profits.when rate of interest increases it would decrease the corporate profits by other things remaining constant. It will reduced the price of the stock.
c. True.
when interest rate increases bonds price decreases will become less attractive to the investors .
d. True
when the market interest rate increases opportunity cost of holding money and interest rate on financial assets will also increased..

2)
Present Value of Perpetuity @ 7%/12 = 0.5833% = $300/0.5833% = $51,429
Present Value of Perpetuity @ 4.25%/12 = 0.3542% = $300/0..3542% = $84,705
Difference = $84,705 - $51,429 = $33,276 approx

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