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.
The risk-free rate plays a crucial role in shaping stock prices because it represents the baseline return investors can earn without taking risk. When the risk-free rate rises, bonds become more attractive, and investors often demand higher returns from stocks to justify their additional risk. This typically leads to lower stock valuations and downward pressure on prices. Conversely, when the risk-free rate falls, borrowing becomes cheaper, future corporate earnings are valued more highly and investors tend to shift money toward equities, pushing stock prices upward. In essence, changes in the risk-free rate influence both the cost of capital for companies and the return expectations of investors, making it a key driver of stock market movements.
