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
Financial Intermediaries These are institutions that link or mediate between the investors and savers: Some examples of financial intermediaries are as follow: 1. Comme

What is the Execution of order in the Stock Exchange When broker receives the margin money and is clear about the order received by him, he puts details in the 'order book'.

Merchant Banks - Banking Institution Merchant Banks begun life as merchants and begun to control in financial firms, during the 19 th Century . The merchant banks act like a

The table below gives data on the average number of football games attended per year among a population of students at a small college, separately by major. All students are in one

Valuation of Securities The previous methods were perfect for valuing the entire business however it is also essential to ascertain the value of part of a business namely shar

Profitability Index or P.I. P.I. (benefit-cost ratio) = Present value of inflows / Present value of cash outlay Whether P.I. is greater than 1.0, invest and whereas less th

Valuation of Bonds and Debentures It will depend on expected cash flows consisting of annual interest in additional the principal amount to be obtained at maturity.  The suita

explain the financial planning process in a private limited company

Commercial Banks - Banking Institutions These are financial institutions such accept deposits of money from the universal public, safeguard the deposits and create them availa