Interest rate levels and stock prices, Finance Basics

Interest Rate Levels and Stock Prices

Interest rates contain two effects on corporate profits:

a) Since interest rate is a cost, and like the higher the rate of interest the lower the firm's profit other things held constant.

b) Interest rates affect the level of economic activities that affect the level of corporate profit.

If interest rates increase sharply, investors can get higher returns in the bond like money market that induces them to sell shares as like stocks and transfer the funds from stock market to money market like Treasury bills.

Interest rates affect stock prices obviously due to the effect on profit however even more significantly they have an effect because of the competition in the market between bonds and shares.

Such transfers in response to increase in interest rates reduces demand for shares in the stock exchange and this obviously depresses the share prices as like in mid and late 1993 the CBK intervened in the short term market where it floated Treasury Bills whose interest rate was as high as 88% well above the returns that can be expected from high yield stocks.

Accordingly, investors removed or misdirected their money or funds from the stock market into Treasury Bills. The conclusion was a stagnation of stock prices of quoted firms. Accordingly as CBK attained its objective of decreasing the money supply in the economy the interest rates declined well beneath 30% and the immediate effect was a re-build in demand for shares and the share prices shot up instantly about February 1994.

Posted Date: 1/30/2013 3:17:36 AM | Location : United States







Related Discussions:- Interest rate levels and stock prices, Assignment Help, Ask Question on Interest rate levels and stock prices, Get Answer, Expert's Help, Interest rate levels and stock prices Discussions

Write discussion on Interest rate levels and stock prices
Your posts are moderated
Related Questions
Bird-in-hand Theory Advanced via John Leitner in year 1962 and furthered with Myron Gordon in year 1963. Argues such shareholders are risk averse and prefer specific. Dividend

Which of the following is true with regards to rising interest rates. A. Use long-term loans to take advantage of current low rates. B. The term of the loan is ot impacted by risin

Stock Exchange Market The Idea and improvement of a Stock Exchange Stock exchange also identified as stock markets are special "market places" whereas already held bond

1. Each project has RM 10,000, and the cost of capital for each project is 12%. The projects' expected cash flows are as follows: Expected Net Cash Flows YEAR

A current radio advertisement states that the average American household has an average credit card debt of $25,000. Based on an APR (Annual Percentage Rate) of 18% (common for cre

Sources of Funds - Finance Venture capital, with combining risk financing along with marketing assistance and management, could become an effective instrument in fostering dev

the two problems below (P1 and P2). Five marks each. Part marks will be allocated, but if you have the incorrect answer then you cannot expect to get more than half marks. Project

Example of Valuation of Bonds and Debentures K is contemplating purchasing a 3 year bond worth 40,000/= carrying a nominal coupon rate of interest of 10 percent.  K necessary

Define the term contractual savings depository institutions. Contractual savings institutions: Contractual savings institutions obtain funds at periodic intervals onto a

If Metropolis Healthcare Systems have 1,150,000 in cash. How long will it take them to accumulate 2,000,000 in cash? Assume an interest rate of 5%..