financial markets
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Part A1
Bonds are a type of long-term debt securities. Investors of bonds are paid interest on a regular basis until the maturity date. The average rate of return the investor will earn over the bond's life when held to maturity is known as the yield to maturity. Yield to maturity is also the discount rate, which equates the bond's price to its present value of total return. The yield to maturity is affected by factors, such as interest rates. Interest rates, in turn are affected by market-wide factors.
One dominating factor which affects interest rates is the inflation rate. When inflation rate is expected to increase, investors will expect the nominal interest rates to increase to compensate them for the lost of purchasing power. Based on the expectations theory, this will result in an upward-sloping yield curve.
A yield curve is a graph of yield to maturity against bond term at any given point in time (Peirson et al...