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The Term Structure of Interest Rates

The Term Structure of Interest Rates

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The Term Structure of Interest Rates

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  1. The Term Structure of Interest Rates

  2. Term Structure of Interest Rates • “The relationship between the interest rates (yields) on a class of similar-risk bonds and time to maturity”

  3. Term Structure of Interest Rates • Yield curve - graphical repre-sentation of term structure

  4. FIGURE 9.3 Two Types of Yield Curves

  5. U. S. Treasury Yield Curve[3 April 2007]

  6. U. S. Treasury Yield Curve[6 November 2007]

  7. U. S. Treasury Yield Curve(28 March 2008)

  8. U. S. Treasury Yield Curve(7 April 2010)

  9. Explanation of Term Structure • Expectations Hypothesis • Liquidity Preference Theory • Market Segmentation Theory

  10. Expectations Hypothesis • “The theory that the shape of the yield curve reflects investor expectations of future interest rates.”

  11. Expectations Hypothesis

  12. 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.”

  13. Liquidity Preference High Demand Low Demand

  14. Market Segmentation Theory • “The theory that the market for debt is segmented on the basis of maturity;

  15. Market Segmentation Theory • that supply and demand within each segment determines the prevailing interest rate;

  16. Market Segmentation Theory L-T Intermediate S-T

  17. Market Segmentation Theory Individuals; Banks L-T Intermediate S-T

  18. Market Segmentation Theory Individuals; Banks L-T Intermediate Insurance Companies; Pension Funds S-T