Question
You often hear market commentators discuss that whenever the yield curve increases, stock prices would fall because a higher discount rate should lead to lower
You often hear market commentators discuss that whenever the yield curve increases, stock prices would fall because a higher discount rate should lead to lower valuation. In 2021, you observed that the entire nominal yield curves shifted upwards i.e., nominal yields increased across all maturities. However, equity markets continued their runs to an all-time high. In contrast, in 2022, an upward shift in the nominal yield curve leads to a sharp decline in equity valuation. A. Discuss the potential rational economic factors that can shift the nominal yield curves upward in both years. (5 marks) B. Explain why there seems to be a disconnect between yields and equity valuation in 2021, but the opposite relationship appears in 2022. Hint: The explanation should link to the potential factors identified in Part A. (5 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started