How do rising interest rates and inflation affect investments?
For most stocks and bonds, particularly growth-style stocks, rising inflation will have an adverse impact on the value of the security. Inflation decreases the value of future cash flows associated with both growth stocks and fixed income investments. Specifically for bonds, rising interest rates will decrease the value of a bond while falling interest rates cause bond prices to rise. Why this inverse relationship? Let us say you have a 6% bond and interest rates fall from 6% to 5%. The price or value of your 6% bond will rise because other investors are now willing to pay a premium to receive a 6% coupon payment over the currently offered 5% coupon payments.
