An investor is trying to decide whether to put his funds into stocks or bonds. He expects rising interest rates over the next year and higher inflation. Your advice?
Bond prices fall as interest rates rise. For yield to rise to the higher interest rate, bond prices offered in secondary markets must decrease. Furthermore, higher inflation will reduce the real value of the principal. So bonds are a poor investment. These factors are not as critical for stock prices. Although not discussed in the text, stocks may be a good hedge against inflation, since their nominal price may rise to maintain real price. Rising interest rates are generally not good for stock prices, but the link is not as strong as for bond prices.
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