How do changes in interest rates typically affect investment decisions?

Changes in interest rates have a profound impact on investment decisions across various asset classes. When interest rates rise, bond yields typically increase as new bonds are issued at higher rates. This makes existing bonds with lower rates less attractive, leading to a decline in their market price. Conversely, when interest rates fall, bond prices tend to rise because their fixed interest payments become more valuable compared to new bonds issued at lower rates.

Additionally, interest rates affect stock market valuations as they influence the cost of borrowing for companies. Higher interest rates can increase borrowing costs, reducing corporate profits and potentially leading to lower stock prices. Investors may also shift their capital allocation, moving away from equities to fixed-income instruments when rates are high, seeking safer returns.

Real estate investments are impacted as well because rising rates can lead to higher mortgage costs, which may reduce demand for housing and consequently affect property values. Similarly, savings accounts are influenced by interest rates but are just one component of the broader investment landscape. Therefore, the statement that changes in interest rates impact bond yields and stock market valuations captures the essence of how interest rates affect a wide array of investment decisions, making it the correct answer.