Question

Which of the following is TRUE concerning the impact of interest rate changes on stock prices?

Group of answer choices

As interest rates rise, stock prices rise because companies earn more profits on invested funds.

As interest rates rise, stock prices generally are unaffected because companies earn more profits on invested funds but pay lower interest costs on borrowed funds.

As interest rates fall, stock prices fall because companies earn lower returns on invested funds.

As interest rates fall, stock prices rise because investors will sell interest-bearing securities and buy stocks, driving their prices up.

Answer 1

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Correct Answer) Statement D.As interest rates fall, stock prices rise because investors will sell interest-bearing securities and buy stocks, driving their prices up

Reasoning:

As interest rates rise, stock prices rise because companies earn more profits on invested funds.FALSE

• An increase in rate leads to decrease in the stock price as for investors cost of borrowing increases so is for the companies. Such factors lead to a decrease in stock price not increase. Therefore the statement is incorrect.

As interest rates rise, stock prices generally are unaffected because companies earn more profits on invested funds but pay lower interest costs on borrowed funds.FALSE

• An interest that is usually done by the central bank like a Federal bank in the US impacts the stock price which can be both negative and positive. Therefore the statement is not completely true.

As interest rates fall, stock prices fall because companies earn lower returns on invested funds. FALSE

• A fall in interest rate usually results in stock prices to increase as investors seek to shift base from interest-bearing instrument to the stock market. The increase in demand of stock results in prices to increase. Hence the statement is incorrect

As interest rates fall, stock prices rise because investors will sell interest-bearing securities and buy stocks, driving their prices up. TRUE

• A decrease in interest rates by the central banks has the opposite effect on stock prices. Investors. view lower interest rates as catalysts for growth, which leads to greater profits for the companies. Such benefits are seen as good returns to investment which makes them shift from interest-bearing securities to buying stocks that drive the demand and ultimately stock prices. Therefore the statement is correct.