Interest Rates Research Paper

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The Effects that Rising and Falling Interest Rate Environments Have on Stocks

Heidi L. Schroeder

Hardin-Simmons University

Abstract

This paper describes the effects that rising and falling interest rates have on stocks. When interest rates rise, the stock market prices fall and when interest rates fall, the stock market prices rise. There are also some differences on the effects on the stock market long-term and short-term.

Rising and Falling Interest Rate Effects on Stocks

According to Capital Markets Vol. 1, an interest rate is the price charged to a borrower for the loan of money (Curtis, 2015, 166). The immediate impact of a rise in interest rate is on companies with high debt in their balance sheet. The interest payment made by them rises which reduces their earnings per share. Thus there would be negative sentiments for such stock; resulting into depleted stock price (Share Market School, www.sharemarketschool.com). In the long term high interest rates would have a more sector specific impact. The sectors which are most impacted by high interest rate is the real estate, automobile and all the capital intensive industries. So, any investment by you in these sectors must be taken with a lot of caution during the situation of high interest rates (Share Market School, www.sharemarketschool.com).

Higher interest rates make borrowing more expensive. Companies that need to borrow significant amounts or are subject to floating rates of interest will pay more to do so. This expense tends to hurt returns on capital, and disproportionately hurt stock prices of more indebted and more leveraged companies (Quora, www.quora.com). Higher interest rates mean more businesses and consumers spend more servicing debt, so the availability of capital to invest goes down; stock prices go down (Quora, www.quora.com).

When interest rates are low you would be saving less and consuming more. Fixed deposits are no longer appealing and it leaves the banks with much...