FINRA Series 86 Research Analyst Practice Exam 2025 - Free Research Analyst Practice Questions and Study Guide

Rising interest rates can indeed lead to lower stock prices primarily because higher interest rates increase borrowing costs for both consumers and businesses. When interest rates rise, it becomes more expensive for companies to finance their operations through loans or to expand their businesses. This can result in reduced spending on capital projects, decreased profitability, and ultimately lower earnings forecasts, which negatively impacts stock valuations.

Additionally, higher interest rates can make bonds and other fixed-income investments more attractive relative to stocks. As investors seek better returns on safer investments like bonds, there may be a shift in capital away from stocks, putting downward pressure on stock prices.

Furthermore, rising interest rates can dampen consumer spending due to higher costs for loans and credit, such as mortgages and credit cards, which can reduce overall economic growth. A slowing economy typically leads to lower corporate earnings expectations, which investors take into account when pricing stocks.

The other choices do not capture the relationship between interest rates and stock prices accurately. The notion that rising interest rates usually have no impact on stock prices overlooks the fundamental economic dynamics at play. Similarly, while it is possible for stock prices to rise theoretically due to other market factors, the typical reaction to increased borrowing costs is negative. Lastly, the idea that rising interest rates always enhance investor