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Bonds Valuation: Term Structure of Interest Rates The term structure of interest rates describes the...

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Finance

Bonds Valuation: Term Structure of Interest Rates

The term structure of interest rates describes the relationship between long- and short-term rates. When these data are plotted, the resulting graph is called a yield curve. A(n) -OPTIONS-abnormal,normal,humped yield curve is upward sloping because investors charge higher rates on longer-term bonds, even when inflation is expected to remain constant. A(n) -OPTIONS-abnormal,normal,humped yield curve occurs when interest rates on intermediate-term maturities are higher than rates on either short- or long-term maturities. A(n) -OPTIONS-abnormal,normal,humped yield curve is downward sloping and indicates that investors expect inflation to decrease. The shape of the yield curve depends on expectations about future inflation and the effects of maturity on bonds' risk.

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