Question

If the rate of interest increases, a asset prices decrease.

True or False?

Answer 1

True.

This is because when interest rates increases then the cost of capital changes for a business and its assets. Increase in interest rate leads to higher interest expenses. As a result earnings decline and the company becomes riskier. This will lead the investors to demand a higher risk premium from the company. This interest rate risk causes the asset prices to fall.

Companies that are highly capital intensive and require lot of property, plant and equipment are more susceptible to this risk.