Create Presentation
Download Presentation

Download Presentation
## The Term Structure of Interest Rates

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -

**Term Structure of Interest Rates**• “The relationship between the interest rates (yields) on a class of similar-risk bonds and time to maturity”**Term Structure of Interest Rates**• Yield curve - graphical repre-sentation of term structure**FIGURE 9.3**Two Types of Yield Curves**Explanation of Term Structure**• Expectations Hypothesis • Liquidity Preference Theory • Market Segmentation Theory**Expectations Hypothesis**• “The theory that the shape of the yield curve reflects investor expectations of future interest rates.”**Liquidity Preference Theory**• “The theory that investors tend to prefer the greater liquidity of short-term securities and therefore require a premium to invest in long-term securities.”**Liquidity Preference**High Demand Low Demand**Market Segmentation Theory**• “The theory that the market for debt is segmented on the basis of maturity;**Market Segmentation Theory**• that supply and demand within each segment determines the prevailing interest rate;**Market Segmentation Theory**L-T Intermediate S-T**Market Segmentation Theory**Individuals; Banks L-T Intermediate S-T**Market Segmentation Theory**Individuals; Banks L-T Intermediate Insurance Companies; Pension Funds S-T