11. Interest rates and their effect on corporate profits and investment prices Interest rates affect corporate profits and security prices. Based on your understanding of the relationship between interest rates and corporate profits and security prices, identify whether each statement is true or false. Statements Interest rates affect the level of economic activity, which in turn affects the profits earned by a business organization, all other considerations remaining constant. Interest rates will affect the preference of investors to own stocks versus owning bonds. A sharp decrease in interest rates will increase the price of bonds, which can significantly decrease the potential for capital gains and the yield earned by a bondholder. This should decrease the demand for bonds compared to the demand for stocks, all other considerations remaining constant. An increase in market interest rates will increase the opportunity cost of investors' funds and increase the price of financial assets. True False O O O To further examine the relationship between interest rates and the price of financial assets, consider the effect of a change in an investor's required return, or opportunity cost, on the price of a financial asset.