A critical evaluation of the theories that account for the phrase "term structure".
Written in 2005; 1,709 words; 6 sources; MLA; $ 55.95
Paper Summary:
The paper discusses what we mean by "term structure" of interest rate and reviews the literature of various theories that govern it. Based on the discussion the paper critically evaluates the theories that have been proposed to account for the "term structure". The paper is well illustrated with tables and graphs.
Outline:
Introduction
Discussion
Conclusion
From the Paper:
"In a normal yield curve the shape (as shown below) is a concave curve formed on the basis of normal market conditions. In this market condition the investors assume that there is no significant change in the economy and that the interest rate continues to grow at a normal pace due to stable rate of inflation. Given the stable conditions of the market, investors expect high yield from fixed income instruments with long term maturities and expect a low yield from short term fixed income. This expectation is based on the rationale that since long term bond attaches high risks of the future, therefore it has high yield while in short term securities, the future is more predictable therefore pose low risks to the investors and hence low yield. In such a condition, when current interest rate increases the price of the bond decreases while the yield will increase."
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