Frequently, stock prices and interest rates move in opposite directions. This can be explained by the following:
A) If interest rates rise, debt instruments now offering higher yields become more attractive relative to some stocks, causing stock sales and declining equity prices, ceteris paribus
B) If interest rates fall, debt instruments will be sold and money will flow into equities, which should perform better due to the lower cost of capital created by lower interest rates
C) As interest rates rise, shareholders will expect less of a minimum rate of return
D) Choices A and B only
E) None of the above

Question

Quizplus · Accepted Answer

Choices A and B correctly explain why stock prices and interest rates often move in opposite directions. A) highlights that higher interest rates make debt instruments more attractive, potentially leading to a sell-off in stocks. B) explains that lower interest rates make equities more attractive due to the lower cost of capital, potentially leading to an inflow into stocks. Choice C is incorrect because higher interest rates typically lead shareholders to expect a higher, not lower, minimum rate of return.

Frequently, Stock Prices and Interest Rates Move in Opposite Directions