The correct answer is: A. The rising interest rate increases the discount rate on cash flows and decreases the market value of that Asset.
A rising interest rate increases the discount rate on cash flows, but it does not necessarily decrease the market value of an asset. The market value of an asset is determined by a number of factors, including the expected future cash flows from the asset, the risk of those cash flows, and the prevailing interest rate. If the expected future cash flows from an asset are high enough, the market value of the asset may actually increase even if the interest rate rises.
For example, consider a bond that pays a fixed interest rate of 5%. If the interest rate rises to 6%, the present value of the bond’s future cash flows will decrease. However, if the bond is expected to continue to pay a fixed interest rate of 5%, the bond’s market value may actually increase, because the bond will now offer a higher yield than other bonds with similar risk.
In general, a rising interest rate will make it more expensive to borrow money, which can lead to a decrease in economic activity. However, a rising interest rate can also make it more attractive to invest in assets that offer a fixed rate of return, such as bonds. This can lead to an increase in the demand for bonds, which can push up their prices and their market value.
Therefore, the statement “The rising interest rate increases the discount rate on cash flows and decreases the market value of that Asset” is not always correct. The market value of an asset is determined by a number of factors, including the expected future cash flows from the asset, the risk of those cash flows, and the prevailing interest rate. If the expected future cash flows from an asset are high enough, the market value of the asset may actually increase even if the interest rate rises.