How do interest rates impact the stock market and bond prices?

Interest rates have a significant impact on both the stock market and bond prices. When interest rates rise, borrowing costs increase, which can reduce corporate profits and make stocks less attractive, often leading to lower stock prices. Additionally, higher rates make bonds more appealing since they offer better returns compared to stocks. As a result, existing bond prices typically fall to adjust for the higher yield. Conversely, when interest rates fall, borrowing becomes cheaper, potentially boosting stock prices and increasing bond prices, as the lower yields make bonds less attractive, causing a decrease in their value.