4. One powerful analytical tool to analyse a company's return on equity (ROE) is the DuPont method of analysis. There are a number of variations of the DuPont analytical technique, which break down the relationship between net income and shareholders equity. One method of ROE analysis uses 3 components that show the relationship of the firm's net profit margin, total asset turnover, and financial leverage. Another, more sophisticated method of ROE analysis uses 5 components that show the interaction of the operating profit margin, total asset turnover, interest expense rate, financial leverage multiplier and tax retention rate. These various components help to analyse the efficiency of a corporation's competitive situation, internal operations, the use of financial leverage, and the impact of the government tax policies. Bond valuation The price of a bond is based on its coupon, maturity and prevailing market interest rates. Bond price volatility depends upon the cash coupon and the time remaining until the bonds maturity. The market value of a bond equals the present value of all future cash flows accruing to the investor. Cash flows for the conservative bond investor include periodic interest payments and principal return. Cash flows for the aggressive bond trader may include periodic interest payments and the capital gained or lost when the bond is sold before its maturity. Bond price movements Any investor contemplating the inclusion of bonds into a portfolio requires an understanding of how and when bond prices change in the marketplace. The coupon rate of the issue, the features of the issue, the credit rating of the issuer and, the term to maturity can affect the bond's market price. The current level of interest rates determines bond prices in the secondary market. When interest rates rise, bond prices fall, on the other hand, when interest rates fall, bond prices rise. A bond's price therefore is said to vary inversely with market interest rates.
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