Question

As interest rates rise, stock prices generally

Group of answer choices

fall because people will sell stocks and buy interest-bearing securities.

fall because returns to stockholders move together with returns to bondholders.

rise because firms realize greater profits as their cost of financing drops.

rise because people will buy interest-bearing securities and sell stocks.

Answer 1

Interest rates rise when the lending environment is contracting. This is done to curtail production. Stock prices rise when interest rate is lower and the economy is booming. So last two options are ruled out that stock price will rise.

Stock price will fall because at higher interest rate, people will buy bonds to benefit from the high interest rate. Stock returns and bond returns move in opposite directions. So correct option is the first one and second option is incorrect