[Investment Basics Part 7] What happens when interest rates rise?
When interest rates rise, do stock prices fall? The answer is, “There is a tendency for downward pressure, but it does not necessarily mean they will fall.”
In Part 7 of “Investment Basics,” we will trace the changes in interest rates, starting from deposits and loans to bonds and stocks.
You can also watch this in a video. The figures in this text are taken from that video.
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Interest for depositors, burden for borrowers
When interest rates rise, the interest earned on deposits tends to increase. On the other hand, for new loans or loans where interest rates are reviewed, the repayment burden can become heavier.
Consider an example of borrowing 30 million yen for 35 years with equal principal and interest repayments, where the same amount is paid back every month. If the interest rate is 1% for the entire period, the monthly repayment is approximately 85,000 yen, and the total repayment amount is approximately 35.57 million yen. If it is 2% for the entire period, the monthly repayment is approximately 99,000 yen, and the total repayment amount is approximately 41.74 million yen.
Calculation example for a 30 million yen loan over 35 years. Comparing the case where the interest rate is 1% for the entire period versus 2%. (Video 01:30)
The interest rate difference is 1percentage point, but the difference in the total repayment amount is approximately 6.17 million yen. Even a small difference in interest rates can have a significant impact when the amount is large and the period is long.
This is an example assuming no bonus payments, excluding fees, etc., and that each interest rate continues for the entire period. It does not mean that everyone’s repayment will increase by 6.17 million yen if the interest rate on an existing loan changes from 1% to 2% midway. The actual impact varies depending on the balance, remaining period, and contract terms such as fixed or variable rates.
Existing bonds move in the opposite direction to interest rates
Bonds are securities issued by governments or companies to borrow money. Here, we consider a general fixed-rate bond that pays a fixed interest and returns the face value at maturity.
Suppose you hold a bond with a face value of 1 million yen that pays 10,000 yen in interest annually. If market interest rates rise and new bonds with the same conditions start paying 20,000 yen annually, the appeal of buying the old bond at face value diminishes.
A bond with 10 years remaining, a face value of 1 million yen, and a 1% annual rate is valued at approximately 910,000 yen when evaluated at a 2% annual yield. (Video 02:19)
With 10 years remaining, annual interest payments, and receiving the 1 million yen face value at maturity, the theoretical price evaluated at a 2% market yield is approximately 910,000 yen. Because it only pays a low interest rate, the purchase price drops to balance with the new interest rate level.
In other words, if other conditions are the same, an increase in market interest rates pushes down the price of existing fixed-rate bonds. This refers to the price for buying and selling midway; it does not mean that the face value received at maturity will decrease by the same percentage as long as the issuer keeps its promise.
100 yen in the future is not the same as 100 yen today
Stock prices include expectations for the profits a company will generate in the future. Interest rates also play a role when discounting that future money back to its present value.
Let’s consider 1 million yen received 10 years from now. If you can invest at 1% per year, you only need about 910,000 yen now to reach 1 million yen in 10 years. If the rate is 3% per year, you only need about 740,000 yen.
The present value of 1 million yen 10 years from now is approximately 910,000 yen at 1% per year, and approximately 740,000 yen at 3% per year. (Video 03:17 )
The calculation is “1 million yen ÷ (1 + interest rate) to the 10th power.” Even if the amount received in the future is the same, the higher the discount rate, the smaller the current value.
While company-specific risks are also added to the actual valuation of stocks, the mechanism by which rising interest rates push down stock prices can be understood through this principle.
Stock prices are not determined by interest rates alone
Even if interest rates rise, stock prices can still go up if a company’s profits grow more than expected. Whether the rate hike was already anticipated by the market is also important.
Because central bank policies affect financial assets, the market pays close attention to meetings and statements. (Video 04:06 )
The previous saying, “Don’t fight the Fed,” can be read as a warning not to ignore the influence of the central bank that moves interest rates. The answer to whether to buy or sell is not determined solely by the announced rate hikes or cuts.
The level of interest rates themselves also changes over time
Ministry of Finance government bond interest rate information In the video graph based on this, Japan’s 10-year government bond yield exceeded 8% in 1990 and even turned negative in 2016. The value on September 25, 2026, is 3.071%.
Trends in Japan’s 10-year government bond yield. The end point of the graph is September 25, 2026. (Video 04:47 )
What is important here is not guessing the next interest rate, but being able to organize what will be affected when it moves. Whether you are the depositor or the borrower, whether you sell bonds midway, or how you evaluate future profits. When you consider your position and conditions separately, the way you view the same interest rate news changes.
Next time, we will look at the events in the UK in 2022, where political decisions spilled over into currency, government bonds, and mortgages.
Read the rest of the series
Sources and References
This article and video are intended for general financial and economic education purposes and do not constitute solicitation or recommendation of specific financial products or stocks. Investing involves the risk of losing principal. Please make actual investment decisions based on your own goals and circumstances. Past performance and illustrative calculation examples do not guarantee future investment results.