Question

Identify the possible impact of an interest rate cut on investments in the capital market in Australia. [Note: Here you can investigate the differences in impact between debt instruments and equity instruments in the capital market, you can use table, chart, graph wherever you would find it appropriate] Discuss each instrument and the impact

Can you please help me? I need to answer this for my job

Answer 1

If the Interest Rate is cut on investment then individual and corporates can borrow money from bank at lower rate of interest which they will use in the consumption. Corporates will spend the money in the Production activity, Individual will spend money in buying the new goods and services.

The Production activities by the corporates will help the company to increase Revenue , which will increase the "Net Income". Thus their stock price will increase because of increase in net income.

A Rational consumer is interested in gaining more return on its saving, but due to interest rate cut he does not get return as per their expectations. So to gain more return on its saving the individual will invest his money in Stock Market to gain more return or Alpha return(returns more than the actual market return). Thus if the money will come in the stock market , this will increase the prices of Stock and will increase liquidity in the Capital Market.

In Debt Instruments the individual will take the money out from the Bonds or Debentures, because less interest rate received in his/her instrument , thus people will shift more towards capital market.