Interest rates have two effects on corporate profits:

 a) Because interest rate is a cost, the higher the rate of interest the lower the firm’s profit other things held constant.

b) Interest rates affect the level of economic activities which affect the level of corporate profit.

 Interest rates obviously affect stock prices because of the effect on profit but even more importantly they have an effect due to the competition in the market between shares and bonds.

 If interest rates rise sharply, investors can get higher returns in the bond (money) market which induces them to sell shares (stocks) and transfer the funds from stock market to money market (Treasury bills).

 Such transfers in response to increase in interest rates reduces demand for shares in the stock exchange and this obviously depresses the share prices e.g in mid and late 1993 the CBK intervened in the short term market where it floated Treasury Bills whose interest rate was as high as 88% well above the returns that can be expected from high yield stocks.

Accordingly, investors removed (misdirected) their money (funds) from the stock market into Treasury Bills. The result was a stagnation of stock prices of quoted firms. Accordingly as CBK achieved its objective of reducing the money supply in the economy the interest rates declined well below 30% and the immediate effect was a rebuild in demand for shares and the share prices shot up instantaneously around February 1994.