Question

In 400 words explain the following:

1. What is the relationship between interest rate level and bond price? Why must this relationship be true? How has the current rate environment impacted the prices of bonds?

2. What are some factors to consider in evaluating a company's ability to make payments on outstanding debt? Please explain the factors rather than just providing a list.

• Apply appropriate examples that illustrate your points - feel free to bring your workplace experiences into the discussion. It helps us all learn when we can relate our past workplace experiences to what we're learning here in the discussions.
• You may not use any quoted material even if sources are cited. Please make sure all posts are written entirely in your own words.

Answer 1

1.

The relationship between price of bond and market interest rate is inverse. That is when interest rate rise, price of bond decrease and when interest rate falls bond price increase.

This is because fixed coupon rate. So if interest rate fall even the bondholder gets the fixed coupon payment so overall value of bond increase. Similarly, when interest rate rises even the bond holder gets the coupon rate at same rate so overall bond price fall.

bond price change according to current market rate. according bond and interest rate level relationship if current is higher than coupon rate then then bond price will be lower than its Par value and Vice Versa.

2.

The following are the factors that which needs to be considered for the purpose of evaluating firm's ability in making debt payments:

1. Liquidity: The firm's liquidity plays a vital role in estimating the paying ability of the firm. This is because liquidity of the firm describes the smooth cash inflow and outflow through its assets,investments and also the financial health of the firm is dependent upon the firm's liquidity. Liquidity is nothing but the ability of the firm in generating the cash that could help it in paying off its liabilities.

2. Solvency: This indicates the firm's existence and sustainability in near by future. Solvency ratios enable in determining the firm's solvency condition.

3. Supplier and Creditor Information: The information about suppliers and creditors of the firm would become a key factor in determining the firm's ability in paying off debt because this factor judges number of suppliers and creditors with whom the firm is tied up in activities of business.

4. Competition : The ability of the firm in sustaining within industry through strategic approaches against the competitive industry determines the going concern concept. Through this factor we could decide its paying ability of debt in foreseeing future.

5. Key Product : The firm's existing products/services and estimated launching products/services would be a key factor in determination of its ability in paying off debt. This is because the product reflection in segment market may impact firm's earnings and payoff abilities.