n NISM Certifications
XV NISM Series XV
Medium

Under discounted cash flow (DCF) valuation, what happens if the risk-free rate increases?

Practice question from NISM XV Mock Test 3 — bank. The correct answer is highlighted below with a full explanation.

Options

  1. The fair value of shares would go down

    Correct answer

  2. B

    The fair value of shares would go up

  3. C

    Risk-free rate would have no impact on share prices

Why this is the answer

An increase in the risk-free rate raises the discount rate used in DCF, reducing the present value of future cash flows and thereby decreasing share value.

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