why bond price fluctuate in response to change interest rate


Assignment: Managerial Finance

Part 1:

Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost for equipment, straight-line depreciation over 5 years to a zero book value, $5,000 pre-tax salvage value of equipment, 35% tax rate, $45,000 additional annual revenues, $15,000 additional annual cash expenses, $8,000 initial investment in working capital to be recouped at project end, and a cost of capital of 11%. Should the project be accepted or rejected? (Show your work computing the NPV.)

Part 2: Essay

Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity?

Part 3:

A stock offers an expected dividend of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%. Its current price is $35.00 and shows no tendency to change. How can you explain this price based on the constant-growth dividend discount model?

Part 4:

Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%: (Show your work)

Stock

Weight

Beta

A

20%

1.6

B

25%

1.2

C

10%

1.0

D

30%

0.9

E

15%

0.8

Part 5: Essay

Discuss the capital asset pricing model in general, the CAPM method of determining expected returns, and how the SML can be used to help predict the movement of a stock's price.

Part 6: Essay

Contrast the Dow Jones Industrial Average and the Standard and Poor's Composite Index.

Format your assignment according to the following formatting requirements:

1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.

2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.

3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.

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Business Management: why bond price fluctuate in response to change interest rate
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