Fixed Income Investments  The Term Structure of Interest Rates
There are three main theories that try to describe the future yield curve:
 Pure Expectation Theory: Pure expectation is the simplest and most direct of the three theories. The theory explains the yield curve in terms of expected shortterm rates. It is based on the idea that the twoyear yield is equal to a oneyear bond today plus the expected return on a oneyear bond purchased one year from today. The one weakness of this theory is that it assumes that investors have no preference when it comes to different maturities and the risks associated with them.
 Liquidity Preference Theory: This theory states that investors want to be compensated for interest rate risk that is associated with longterm issues. Because of the longer maturity, there is a greater price volatility associated with these securities. The structure is determined by the future expectations of rates and the yield premium for interestrate risk. Because interestrate risk increases with maturity, the yield premium will also increase with maturity. Also know as the Biased Expectations Theory.
 Market Segmentation Theory: This theory deals with the supply and demand in a certain maturity sector, which determines the interest rates for that sector. It can be used to explain just about every type of yield curve an investor can came across in the market. An offshoot to this theory is that if an investor wants to go out of his sector, he'll want to be compensated for taking on that additional risk. This is known as the Preferred Habitat Theory.
Implications of the Yield Curve for the YieldCurve Theories
1. Pure Expectation Theory
According to this theory, a rising term structure of rates means the market is expecting shortterm rates to increase. So if the twoyear rate is higher than the oneyear rate, rates should rise. If the curve is flat, the market is expecting that shortterm rates will remain low or hold constant in the future. A declining rateterm structure indicates the market believes that rates will continue to decline.
2. Liquidity Preference Theory
Under this theory, the curve starts to get a little bit more bent. With an upward sloping yield curve, this theory really has no opinion as to where the yield curve is headed. It could continue to be upward sloping, flat, or declining, but the yield premium will increase fast enough to continue to produce an upward curve with no concerns about shortterm interest rates. When it comes to a flat or declining term structure of rates, this suggests that rates will continue to decline in the short end of the curve given the theory's prediction that the yield premium will continue to increase with maturity.
3. Market Segmentation Theory
Under this theory, any type of yield curve can occur, ranging from a positive slope to an inverted one, as well as a humped curve. A humped curve is where the yields in the middle of the curve are higher than the short and long ends of the curve. The future shape of the curve is going to be based on where the investors are most comfortable and not where the market expects yields to go in the future.

Professionals
Yield Curve
Yield Curve 
Professionals
Yield Curve Risk
CFA Level 1  Yield Curve Risk. Learn how yield curve risk can affect your bond portfolio and how the various shifts in the yield curve relate to interestrate risk. 
Professionals
Yield Curves
FINRA/NASAA Series 65: Section 8 Yield Curves. In this section normal, inverted and flat yield curves and yield spreads. 
Professionals
Yield Curves
CFA Level 1  Yield Curves. Learn how governments can influence short and longterm interest rates. Discusses the various shapes of yield curves and how they are formed. 
Investing
Trade Bond ETFs Using Yield Curves
Different types of yield curves provide important insights for trading bondbased securities. 
Fundamental Analysis
Understanding Term Structure of Interest Rates
The term structure of interest rates is a common method of valuing bonds. 
Bonds & Fixed Income
Advanced Bond Concepts: Term Structure of Interest Rates
The term structure of interest rates, also known as the yield curve, is a very common bond valuation method. Constructed by graphing the yield to maturities and the respective maturity dates ... 
Term
Interest Rate Predictions With Expectations Theory
The expectations theory uses longterm interest rates to predict future shortterm interest rates. 
Investing Basics
Understanding the Inverted Yield Curve
An inverted yield curve occurs during the rare times when shortterm interest rates are higher than longterm interest rates. 
Bonds & Fixed Income
The Impact Of An Inverted Yield Curve
Find out what happens when shortterm interest rates exceed longterm rates.

Biased Expectations Theory
A theory that the future value of interest rates is equal to ... 
Expectations Theory
The hypothesis that longterm interest rates contain a prediction ... 
Yield Curve
A line that plots the interest rates, at a set point in time, ... 
Market Segmentation Theory
A modern theory pertaining to interest rates stipulating that ... 
Normal Yield Curve
A yield curve in which shortterm debt instruments have a lower ... 
Flat Yield Curve
A yield curve in which there is little difference between shortterm ...

Why are the term structure of interest rates indicative of future interest rates?
Learn why economists believe the term structure for interest rates reflects investor expectations for future interest rates ... Read Answer >> 
What is the difference between term structure and a yield curve?
Understand the difference between the term structure of interest rates and a yield curve, if any. Learn what the yield curve ... Read Answer >> 
What does market segmentation theory assume about interest rates?
Learn about how the market segmentation theory for different maturities of interest rates seeks to describe the shape of ... Read Answer >> 
How can the yield curve help me make investment decisions?
Learn about the yield curve, and discover why this chart is an important economic indicator. How do Treasury bond yields ... Read Answer >> 
What does the yield curve actually predict?
Find out what an inverted yield curve represents, how it has performed as a leading indicator and why it appears to hold ... Read Answer >> 
What are the different formations of yield curves?
Find out more about the yield curve and yield curve formations, what yield curves measure and the three main types of yield ... Read Answer >>