Should lower interest rates equal higher equity prices?

Being fresh out of university and still indoctrinated by theoretical finance, I was intrigued by a recent discussion in the office about the current low yield environment. From the theoretical perspective low yields equates higher equity prices and here is a short explanation why. What is $100 in a year worth today? The maximum price you would theoretically pay for any investment is the sum of the net future cash flows it will deliver to you, discounted to today’s dollars at an appropriate rate (known as the ‘discount rate’). For instance if you could get 3% interest on your money,...

Being fresh out of university and still indoctrinated by theoretical finance, I was intrigued by a recent discussion in the office about the current low yield environment.

From the theoretical perspective low yields equates higher equity prices and here is a short explanation why.

What is $100 in a year worth today?

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