finance (higher interest rate)
posted by Jason on .
A higher interest rate (discount rate) would?
A. reduce the price of corporate bonds
B. reduce the price of preferred stock
C. reduce the price of common stock
D. all of the above
I remember reading about the relationship between interest and bonds/stocks.
When the FR raises rates the price of bonds goes down.
When the rates go up stocks go up because the risk free rate increased, so stocks must cover the risk free rate + the premium rate.
I like A for the best answer....Is that correct???
I think all of the above because:
A. when rates go up you can buy a bond for less and get the same interest payments.
B. For the same reason, I would pay less for preferred stock paying the same interest payments as before rates went up.
C. If interest rates are high, why not buy a bond instead of a stock, E=especially if buying stock with borrowed money (on margin)?