Suppose There Is a Reduction of the Return Provided on U.S

question 6

Multiple Choice

Suppose there is a reduction of the return provided on U.S. Treasury bonds. We should expect the current price of stocks to: $\mathrm{P}_{\text {today }}=\frac{\mathrm{D}_{\text {today }}(1+g) }{r f+r p-g}$

• A) increase since the risk-free return is now lower.
• B) decrease since U.S. Treasury bonds are safer.
• C) increase since the risk premium on the stocks will increase.
• D) stay the same; there is no effect on stock prices from this reduction.

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