The Term Structure of Interest Rates

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)

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

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

12. Expectations Hypothesis

13. 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.”

14. Liquidity Preference High Demand Low Demand

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

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

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

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

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