Encyclopedia > Term Structure of Interest Rates

  Article Content

Term Structure of Interest Rates

Interest rates are a factor of the current rate, expected inflation and future interest rates. There are three main theories attempting to explain how interest rates vary with time.

Market Expectations (Pure Expectations) Theory Interest rates are quoted according to the associated time periods. A CD (Certificate of Deposit[?]) for 2 years will pay a different rate than a CD for 1 year. The Market Expectations theory states that a CD for 2 years will pay the same interest rate as a CD for 1 year followed by another CD for 1 year.

Liquidity Preference Theory This theory states that borrowers pay an incentive to lenders inorder to obtain funds for longer duration. This explains why interest rates for longer term periods are higher than shorter time periods.

Market Segmentation Theory This theory states that investors prefer to operate within their own segment (of time periods)



All Wikipedia text is available under the terms of the GNU Free Documentation License

 
  Search Encyclopedia

Search over one million articles, find something about almost anything!
 
 
  
  Featured Article
Eurofighter

... Initial deliveries of the Typhoon to the RAF have begun. The first unit to form will be an Operational Conversion Unit[?] at RAF Conigsby[?] in 2004. The ...

 
 
 
This page was created in 37.4 ms