Structure of Interest Rates

What is the term structure of interest rates?

The term structure of interest rates is also called the yield curve and it represents the relationship between interest rates (or government bond yields, as they are considered risk-free) and different terms or maturities. When graphed, the term structure of interest rates normally has an upward slope due to the higher risk associated with longer term investments, but under certain conditions it can have different shapes. The yield curve is simultaneously a consequence but also an indicator of the current state of an economy.

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While the yield curve can be used to represent any category of bonds, it should be representing bonds of the same level of risk, so that the only difference in rates can be explained by the different maturities (and consequent liquidity preference). As such, considering governments bonds exist for all maturities unlike bonds of a single corporation, normally government bond rates.


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