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
Uses and Application of Ratios Ratios are required in the following ways via managers in different firms. 1. Evaluating the efficiency of assets employment to generate sale

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

Benefits of Payback Period 1. use simply and understand and it has created it popular among in ascertaining the viability of venture executives, mainly traditional financial m

Some of the policies decided by the proprietor are: 1) Time of operating the business 2) Promotion through advertising or special offers 3) Dealing with suppliers and cus

Question 1: a) What is dependency ratio and why is it important for pensions? b) For which types of schemes is dependency ratio mostly relevant? Explain c) What is the

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

Illustrate in brief about the Investment  Process A  typical  investment  decision  undergoes  a  five  step  procedure which, in turn, forms the foundation of investment pr

Calculate total number of ordinary shares Example Company XYZ Ltd has sold 10,000 ordinary shares of Shs.30 as partly called up plus 20,000 Shs.45 preference shares, tha

how to make a perdiem claim format to maintain the records of staff

Long Term Lenders - Measuring Business Performance Long term lenders These involve finances with loans, mortgages and debenture holders.  These have both short and long