Question

Suppose that interest rates for Treasury Bonds rose from 5% to 10% because of higher interest rates in Europe. What effect this increase in Treasury Bond’s interest rates have on the average corporation’s common stock?

Answer 1

If the interest rate for treasury bonds is increased from 5 % to 10%, then it would mean that it would be providing up with better investment opportunity at a low risk because this treasury bonds are government backed securities and these are high risk free securities.

The average corporations common stocks will be not preferred by investors to invest into, because these treasury bonds are offering up with the higher return and they would be preferred by various investors because they are highly risk free and better rated securities and they are not exposed to the risk because they are also government backed securities. Corporations common stocks are highly exposed to various kinds of risk and there is no assurance of return, so these bonds will be providing up with the alternative to various investors because these are offering almost double-digit rate of return.