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Arbitrage between bonds ol different maturities implies that thc price ot a bond is the present value of thc payments on the bond, discounted using current and expected short-term interest rates over thc life of the bond. I lence, higher current or expected short-term interest rales lead to lower bond prices.
Thc yield to maturity on a bond is approximately) equal to the average ot current and expected short-term interest rates over the lile ol a bond.
The slope ol the yield curve (equivalently, the term structure) tells us what financial markets expect to happen to short-term interest rates land thus monetary policy) in thc future.
4 As you will sec in Chapter 23. the Wall Street crash in 1929 was a major contributing factor to the sort of the Great Depression.
4 The RBA has followed this approach in recent years. For example, in many of its statements on monetary policy since 2002 it has warned about the risks of excessive house price increases.
A downward-sloping yield curve (equivalently, long-term interest rates lower than short-term interest rates) implies that the market expects a decrease in short-term interest rates,- an upward-sloping 
yield curve I equivalcntly, long-term interest rates higher than short-term interest rates implies that the market expects an increase in short-term rates.
• The fundamental value of a stock is the present value ol expected future real dividends, discounted using current and future expected one-year real interest rates. In the absence of bubbles or lads the price ol a slock is equal to its lundamenial value.
• An increase in expected dividends leads ю an increase in the fundamental value of stocks, an increase in current and cxpectcd one-year interest rates leads to a decrease in their lundamenial value.
• Changes in output may or mav not be associated with changes in stock prices in the same direction. Whether they arc depends on I i what the market expected in the first place, 121 the source ot the shocks and (3) how the market expects the central bank to react to the implications ol the output change.
• Slock prices and housing prices can be subject to bubbles or lads that lead an assets price to differ trom its fundamental value. Bubbles arc episodes where financial investors buy an asset for a price higher than its fundamental value in anticipation of reselling the asset at an even higher price. Fad is a general word for times when, lor reasons ol fashion or over-optimism, financial investors are willing to pay more than the fundamental value ol the asset. It is very difficult lor central banks to know how and when lo respond 10 assei market bubbles. When major crises occur, with panic in stock markets and crcdit frozen policy-makers need to intervene early on.