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Impact of Interest Rate on Equity Market Valuation

Earning Yield: Earnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio. The earnings yield is quoted as a percentage, allowing an easy comparison to going bond rates. Bond Yield( also known as Interest Rate ): A bond yield is the amount of return an investor will realize on a bond. Though several types of bond yields can be calculated, nominal yield is the most common. This is calculated by dividing amount of interest paid by the face value. It is highly recommended to invest in Equity Market when the Earning Yield is at par or below the bond yields. Presenting Case of Earning Yields and Bond Yield: CASE I Bond Yield in a country is 5% and EPS of the Broad Market Index is 500 and the Market Index is at 10,000 ( in a case where earning yield matches the Bond Yield) Now the country decides to reduce the Interest Rate by 0.50% Impact on Equity Market will be that the Market will trade @ 500/(0.05-.005)=11,111 giving 11.11% ris…