Final answer:
If an investor's required rate of return on a stock increases, the stock's value will decrease because the present value of its future cash flows falls. Interest rates decline due to a rise in supply, and the quantity of loans increases with a rise in demand or supply. Stocks offer higher returns than bonds, which in turn outperform savings accounts over time.
Step-by-step explanation:
If an investor's required rate of return increases and all other characteristics of a stock remain the same, the value of the stock will decrease. This is because the price of a stock is the present value of future cash flows, discounted at the required rate of return. When the required rate of return goes up, the present value of those cash flows goes down, leading to a decrease in the stock's value.
Impact of Interest Rates on Financial Markets
A decline in interest rates can be attributed to a rise in supply of funds in the financial market. Conversely, an increase in the quantity of loans made and received is typically caused by a rise in demand for loans or a rise in supply of funds.
Bonds have an average return higher than a savings account because their value varies more due to interest rate fluctuations. However, stocks have higher returns than bonds over a sustained period because their values can change substantially from year to year.