SIE practice questionmediumREITs — Interest Rate Sensitivity
Rising interest rates generally have what effect on REIT prices?
- AREIT prices tend to fall because higher rates increase borrowing costs and make bonds more competitive for income investors✓ Correct answer
- BREIT prices always rise regardless of rate changes due to the 90% distribution requirement
- CInterest rates have no effect on REIT prices
- DREIT prices tend to rise because higher rates increase property values
Explanation
Why A — REIT prices tend to fall because higher rates increase borrowing costs and make bonds more competitive for income investors
Rising interest rates typically pressure REIT prices for two reasons: (1) higher borrowing costs reduce profitability since REITs often use leverage to acquire properties, and (2) higher-yielding bonds become more competitive alternatives for income-seeking investors, reducing demand for REIT shares. However, REITs may still perform well if rising rates are accompanied by strong economic growth driving higher rents.
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