Price Earnings Ratio (PER) Interest Rates

How the Interest Rates affect the Price Earnings Ratio
We have already looked at that if an investor wanted to obtain a profit of K of 10 for 100, he or she would be willing to pay a maximum PER of 10; and if he or she conformed to a profit of 5 for 100, he would be willing to pay a PER of 20.

This profit demanded by the investor depends on the risk free profit, or in other words, of the profit the investor can obtain with complete security (without risk) investing in a treasury bill, deposit, money fund, state bond or something similar etc. If the people invest in the exchange, it is because they hope to obtain a higher profit than the fixed income. In other words, the profit K that the investor hopes to obtain will be the same to the risk free profit plus a premium of risk. Today we are going to take care of the risk free profit that comes about by the types of interest of the fixed income.

At first, the higher the type of interest, the greater the profit the investor asks for will be, and therefore, the PER he is willing to pay for the share will be less. And the other way around, the least type of interest, the higher PER the investor will be willing to pay. In the following we will see if this inverse relation has taken place in reality.