How do interest rates affect stock and bond prices?

Interest rates are the price of money, and they affect almost every investment. When rates rise, newly issued bonds pay more, so existing bonds with lower rates lose value; future company profits are discounted more heavily, so stock valuations tend to fall; and cash becomes more attractive. When rates fall, the effects reverse.

Bonds: the inverse relationship

A bond's price is the present value of its future payments, discounted at the market interest rate $y$ :

P = \sum_{t=1}^{n} \frac{C}{(1 + y)^t} + \frac{F}{(1 + y)^n}

where $C$ is the yearly coupon and $F$ the face value repaid at maturity. A higher $y$ lowers every term, so the price falls.

How much it falls is described by the bond' $s \times \times \text{duration} \times \times D$ — roughly its average time until repayment, in years:

\frac{\Delta P}{P} \approx -D \times \Delta y

A simple illustration

A bond fund has a duration of 7 years, and market interest rates rise by 2 percentage points:

\frac{\Delta P}{P} \approx -7 \times 2\% = -14\%

That is roughly what happened to many longer-term government bond funds in 2022, when rates rose sharply after years near zero. A short-term bond fund with a duration of 2 years would have lost only about 4%. Once rates are higher, though, the bonds pay more interest, which gradually makes up for the price loss.

Stocks: the discount rate

A stock's value can be seen as the present value of its future cash flows. In the simplest model, with a next dividend $D_1$ , a required return $r$ and a growth rate $g$ :

P = \frac{D_1}{r - g}

Higher interest rates raise the required return $r$ , which lowers the value — most of all for companies whose profits lie far in the future.

Growth stocks, whose profits are expected mostly in later years, are the most sensitive. In 2022, many technology stocks fell far more than the market.
Banks and insurers can benefit from higher rates, which raise their lending and investment income.
Real estate and utilities, often financed with debt and valued for their steady income, tend to suffer.

What it means for a portfolio

Bonds diversify stocks only when interest rates are not the main driver of both. When inflation pushes rates up, both can fall together.
Duration is a choice. Shorter bonds reduce the sensitivity to rates, at the cost of lower gains when rates fall.
Cash earns more when rates are high, which raises the bar for every other investment.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

How do interest rates affect my portfolio?

Interest rates matter because they change discount rates, borrowing costs and investor demand — and those channels affect different parts of your portfolio differently.

Here is your exposure by instrument type:

Asset	Value (€)	Weight (%)
Stock	62.593,70 €	45,01%
ETF	59.448,20 €	42,75%
Crypto	9.020,47 €	6,49%
Cash	8.000,00 €	5,75%

How to read this for interest rates

Cash: higher policy rates usually raise the return on cash and short-term deposits; you hold 5,75% in cash (liquid, low sensitivity).
Stocks & ETFs: your main exposures are Stock and ETF. Rising rates tend to reduce valuations through higher discounting and can shift sector performance; sectors and companies with long-duration cash flows (e.g., many Technology names) are often more rate-sensitive.
Financials & real estate: banks and insurers in Financial Services may react differently to rate moves than Real Estate; your sector breakdown is available and the sector coverage shown is 87,18% — the sector view therefore covers only that share of the portfolio.
Crypto and growthy single stocks: Crypto and high-volatility stocks can move strongly and often independently of rates; they also contribute materially to portfolio volatility.
Volatility channel: rate moves can raise market volatility short-term, which shows up via the assets that already drive volatility in your portfolio.

If you want, I can show the specific holdings most exposed to rate-driven moves or run a simple scenario illustrating a uniform rate shock.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

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