Blanchard1 Amighini and Giavazzi2 Macroeconomics3 A European Perspective4 1

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Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1 st Edition, © Pearson Education Limited 2010 Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1 st Edition, © Pearson Education Limited 2010 CHAPTER 15: FINANCIAL MARKETS AND EXPECTATIONS Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1 st Edition, © Pearson Education Limited 2010 Slide 15.2 Bonds differ in two basic dimensions: • Default risk, the risk that the issuer of the bond will not pay back the full amount promised by the bond. • Maturity, the length of time over which the bond promises to make payments to the holder of the bond. Bonds of different maturities each have a price and an associated interest rate called the yield to maturity, or simply the yield. 15-1 Bond Prices and Bond Yields Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1 st Edition, © Pearson Education Limited 2010 Slide 15.3 The relation between maturity and yield is called the yield curve, or the term structure of interest rates. 15-1 Bond Prices and Bond Yields (Continued) Figure 15.1 UK yield curves: June 2007 and May 2009 The yield curve, which wa...