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Number 2: Explain the answers to the following: (a) An increase in fixed costs and a...

Number 2: Explain the answers to the following:

(a) An increase in fixed costs and a decrease in variable costs will increase the breakeven point and increase the profit of a business. Why is this true?

(b) A decrease in the interest rate in the market will incre4ase the market price of a bond. Why?

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Answer #1

1.
Breakeven Point=Fixed Costs/(Price-Variable Costs)
We see that breakeven point is directly proportional to fixed costs and inversely proportional to variable costs so increase in fixed costs and a decrease in variable costs will increase the breakeven point

2.
Price of bond=Present value of cash flows=Present value of coupon payments+Present value of principal payments

We know that present value of a cash flow rises with fall in interest rate. Hence, decrease in the interest rate in the market will increase the market price of a bond

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