Hi, I need help with essay on Managing Capital Markets and finance/ Calculation. Paper must be at least 1000 words. Please, no plagiarized work!
Then at the end of year lender will be paid back $ 108 but due to inflation these $ 108 would actually value at about $ 96. Hence the lender would actually be paying $ 4 to borrower for using his money. To avoid the situation nominal interest rates are charged to compensate for the inflation that exists in the economy. And as the inflation rates are high, the nominal rates also go high (McConnell C. & Brue S., 2002).
4. If there is an expectation of lower interest rates and the bonds are offering coupon rates higher than the expected future interest rates then the bond prices will rise since more and more people will try to invest in bonds due to higher coupon payments associated with them. Since the yield curve shows the relation between the yield and the maturity of securities. With the expectation of lower interest rates in the future, the yield to short term maturities will be high as compared to the long term maturities and it will take the shape of an inverted yield curve.