The relationship between asset class, interest rates and Inflation:

Question 1

What are the effects of rising interest rates on cash income

Answer 1

Savings accounts on variable rates
rise, fixed rates become poor value.

Question 2

What are the effects of rising interest rates on cash capital

Answer 2

Not affected as capital remains the same

Question 3

What are the effects of rising interest rates on Fixed interest Income and capital value and will new bonds be issued?

Answer 3

Prices (capital value) fall for new and existing bonds; Therefore, new bonds will be issued with higher coupons meaning higher yields.

Question 4

What are the effects of rising interest rates on Equities

Answer 4

Corporate and Personal debt repayments increase (less money to spend) and therefore company profits are reduced (lower demand for products and higher
corporate debt servicing) = lower dividends and falling share price.

Question 5

What are the effects of falling interest rates on fixed and variable Cash Income

Answer 5

Fixed rate savings look good value.
Variable rates don’t.

Question 6

What are the effects of falling interest rates on Cash Capital

Answer 6

Not affected as capital remains
the same

Question 7

What are the effects of falling interest rates on Fixed interest Income and capital

Answer 7

Prices (capital value) rise for existing bonds as they become attractive given the
income they provide. Therefore, new bonds will be issued with lower yields as bonds become an attractive investment. People are happy to pay more.

Question 8

What are the effects of falling interest rates on Equities

Answer 8

Corporate and Personal debt repayments reduce (more money to borrow and spend)
and therefore company profits are increased (higher demand for products and
lower corporate debt servicing) = higher dividends and rising share price.

Question 9

What are the effects of rising inflation on variable and fixed Cash income

Answer 9

Variable rate accounts typically keep in line with inflation. Fixed rate accounts will suffer if inflation rate is higher than the fixed rate.

Question 10

What are the effects of rising inflation on Cash capital

Answer 10

Erosion of real value

Question 11

What are the effects of rising inflation on Fixed interest Income and capital

Answer 11

Fixed interest investments are not as attractive as other investments. Spending power of the “fixed income” will fall. Prices fall and yields will rise to compensate.

Question 12

What are the effects of rising inflation on Equities

Answer 12

A good hedge against inflation. Company profits should increase in line with inflation and in turn creating increased dividends and share price.

Question 13

What are the effects of falling inflation on variable and fixed Cash income

Answer 13

Variable rate accounts typically keep in line with inflation. Fixed rate accounts will look
attractive if higher than inflation rate.

Question 14

What are the effects of falling inflation on Cash capital

Answer 14

Erosion of real value takes longer to happen

Question 15

What are the effects of falling inflation on Fixed interest Income and capital

Answer 15

Fixed interest income looks more attractive if higher than the inflation rate. Prices rise and yields will fall.

Question 16

What are the effects of falling inflation on Equities

Answer 16

Profits slow down as demand for products and services reduce, however returns
should still exceed those of other investments over the longer term.