Term Structure Of Interest Rates

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DEFINITION of 'Term Structure Of Interest Rates'

The relationship between interest rates or bond yields and different terms or maturities. The term structure of interest rates is also known as a yield curve and it plays a central role in an economy. The term structure reflects expectations of market participants about future changes in interest rates and their assessment of monetary policy conditions.

BREAKING DOWN 'Term Structure Of Interest Rates'

In general terms, yields increase in line with maturity, giving rise to an upward sloping yield curve or a "normal yield curve." One basic explanation for this phenomenon is that lenders demand higher interest rates for longer-term loans as compensation for the greater risk associated with them, in comparison to short-term loans. Occasionally, long-term yields may fall below short-term yields, creating an "inverted yield curve" that is generally regarded as a harbinger of recession.

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RELATED FAQS
  1. What does it signify if the term structure of an interest rate's curve is positive?

    When the term structure of interest rates is positive, it is a signal to economists the short-term yields on similar bonds ... Read Full Answer >>
  2. What is the difference between term structure and a yield curve?

    There is no difference between term structure and a yield curve; the yield curve is simply another name to describe the term ... Read Full Answer >>
  3. Why is term structure theory of importance to economists?

    The term structure theory, also known as the term structure of interest rates, is important to economists because it lets ... Read Full Answer >>
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  5. What are the different formations of yield curves?

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    You can create a yield curve in Microsoft Excel if you are given the time to maturities of bonds and their respective yields ... Read Full Answer >>
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