Untitled2_34 - 24 Principles of banking and finance The...

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The term structure of interest rates The term to maturity influences the interest rate. Bonds with identical risk may have different interest rates because of the difference in the time remaining to maturity. A yield curve plots the interest rates of bonds with different maturity but the same risk. It describes the term structure for a particular type of bond. The yield curve can be: upward (the long-term rates are above the short-term rates); flat (short- and long-term interest rates are the same); and inverted (long-term interest rates are below short- term interest rates). Usually we observe upward slope of the yield curve. Nowadays the shape of the yield curve is the one shown in Figure 2.5. Figure 2.5: US Treasury yield curve rates (8 February 2008) Source: Graph created using data from: http//bonds.yahoo.com/rates.html. Activity 2.9 Consult http://bonds.yahoo.com/rates.html. This shows the interest rates paid on US Treasury bonds, municipal bonds and corporate bonds. Then try the following questions:
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