Hi, For equity - Why could lower real interest rates decrease the real rate of return that investors use to discount future dividend flows? Also, similarly for property, why should lower real interest rates lead to a higher value placed on future rents? Sorry if these are basic questions, it's not obvious to me. Thanks, Fran
If interest rates are lower, the investor's required rate of return is also likely to be lower. Using the discounted cashflow models described in Chapter 23, a lower required rate of return (used to discount the future income streams) leads to a higher equity or property valuation. Equivalently, if the rates of return that an investor could expect to achieve on cash (or bonds) falls, then other types of investment will appear more attractive and hence have a higher value to the investor. Hope that helps?
