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Friday, May 11, 2012

Investments and Risk Free Rate

investment
There are many relations in investment and fiance world. Some of them are changing over time others are stable for centuries. 

One of such stable relations is risk free rate and returns of investments. As we know there are two kinds of main investments. One kind is fixed income investments as bonds and another kind is dynamic income investments as stocks. Both these types are very important in relations to risk free rate. Or maybe we could say that those investments simply depend on such thing as interest rate. 

The higher is risk free rate the higher will be interest rates of new bonds or other fixed income investments. But it does not work for old bonds because if you own some bonds and risk free rate increases then your bonds will lower in value instantly as yield of those bonds will stay the same. It is how risk free rate as interest rate works for such cases. 

But relations to stocks and similar investments is completely different. Stocks also depends from interest rates. Because when rates are higher investors are seeking for higher returns and that makes the prices of stocks to decrease. If interest rates in the markets are decreasing then it may make the prices of stocks and similar investments higher. You can check out for interest rates in Google Finance