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"An increase in the required rate of return will increase both bond and stock prices." what...

"An increase in the required rate of return will increase both bond and stock prices." what do you think of this statement? explain
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Answer #1

Solution :-

The Statement given that An increase in the required rate of return will increase both bond and stock prices is Incorrect ,

Stock Price is equal to Present Value of Dividends

Bond Price is equal to Present value of Coupon Payments and Redemption Value

As increase in required rate of return will decrease both bond and stock prices.

As the interest increase the Present Value decrease and the value of bond or stock prices both calculated by adding the present value of all Cash flows.

So if the required return increase then the present value of Cash flows decrease which means stock price decreases Similiarly in case of Bond also.

If there is any doubt please ask in comments

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