ABSTRACT
This chapter discusses interest rates in depth; how they are determined, why they change and how they help to establish the value of debt instruments. The relationship between risk and return is reflected very clearly in how interest rates are determined, highlighting one of the fundamental principles. The yield curve, or the relationship between short-term and long-term interest rates, is discussed in depth, including theories used to explain the shape of the yield curve at any given time. The relationship between interest rates and returns to stocks is discussed using recent research into how and why that relationship has changed over time.
