This essay focuses on BACKGROUND In finance, we value investments. Think about the basic equation for present value: PV = FV/(1 + r) where PV is the present value, or expected price.
(including stocks and bonds) base on their expected future cash flows, which we then discount “at the appropriate (required) rate”. Think about the basic equation for present value: PV = FV/(1 + r) where PV is the present value, or expect price we would pay for an investment, FV is the future cash flow and “r” is the require rate of return for the investment. Each expected future cash flow is discount for the appropriate number of years. As we have see in Module 3 so far, interest rates are heavily by inflation. From this, it is easy to see why if the interest rate increases, the PV, or expect price is expect to decrease.
The important thing to note here is “expect future cash flows”. When we say (see lecture notes and practice problems) that “interest rates have risen, what is the effect on prices?” “all else equal”. What is meant is that for practice problems and for EXAMS, keep to the basics, don’t assume anything other than the indicated change has (or will) occur.
. The market does not use the assumption “all else equal”! . Next, read the article from Yahoo Finance “Stocks rise on higher interest rates”. 1) Discuss the difference in the two articles. 2) Research at least one additional credible source (skipping Investopedia/Wikipedia basically)
that deepens the discussion, supporting the concept of the market having the “bigger picture” in mind. . Hint one possible idea: There have been some interesting articles reporting how some Americans are spending their stimulus checks.