Pdf a theory of the term structure of interest rates, econometrica. Theories of the term structure of interest rates finance. Pdf this paper uses an intertemporal general equilibrium asset pricing model to study the. Denote the yield of a bond at time t with n periods to maturity by yt n. Only market expectations for future rates will consistently impact the yield curve shape. Theories of term structure of interest rates add remove this content was copied from view the original, and get the alreadycompleted solution here. A theory of the term structure of interest rates request pdf. We study a bond market model and the related term structure of interest rates in which the prices of zero coupon bonds are driven by a multidimensional l. Liquidity premium theory of interest rates finance zacks. The determinants of this relationship have long been a topic of concern for economists.

This is identical with the yield to maturity, or internal rate of return, on a zero coupon bond. A positively shaped curve indicates that rates will increase in the future, a flat curve signals that rates are not expected to change, and an inverted yield curve points to interest rates falling in the future. The term structure of interest rate refers to the relationship between time to maturity and yields for a particular category of bonds at a particular point in time. Explanations of the term structure of interest rates it is the thesis of this investigation that the term structure of interest rates can be explained better by a combination of the expectations and liquidity preference hypotheses than by either hypothesis alone. Liquidity premium theory combines the two theories to. Chapter two deals with the theory of the term structure of interest rates, and a. This paper uses an intertemporal general equilibrium asset pricing model to study the term structure of interest rates.

Understanding the term structure of interest rates a negative. Economic theory predicts, however, that it is primarily real interest rates interest rates net of expected inflationthat influence the decisions of households and firms, it is possible to formulate versions of most term structure theories. The term structure of interest rates measures the relationship among the yields on defaultfree securities that differ only in their term to maturity. Expectations theory of the term structure of interest. The simple expectations theory implies that the 10year bond rate reflects the expected path. Economic theory suggests that monetary policy may have a. A theory of the term structure of interest rates semantic scholar.

In this model, anticipations, risk aversion, investment alternatives, and preferences about the timing of consumption all play a role in determining bond prices. Understanding the term structure of interest rates. Abstractthis paper uses an intertemporal general equilibrium asset pricing model to study the term structure of interest rates. The theory of the term structure of interest rates, although it has not figured in. The term structure of interest rates concerns the relationship among the yields of defaultfree securities that differ only with respect to their term to maturity. Particular theories are developed to explain the nature of bond yields over time. Term structure of interest rates theories bbalectures.

Term structure of interest rate definition, theories. Understanding the term structure of interest rates federal. Refers to the interest rate that prevails over a specific time period. The term structure of interest rates, also called the yield curve, is a graph that plots the yields of similarquality bonds against their maturities, from shortest to longest. The term structure of interest rates comprises the interest rates of riskfree zerocoup. Historically, three competing theories have attracted the widest attention. Term structure of interest rate is defined as relation between interest rate and yield curve for default free securities having different maturity john cox et al, 1985. Term structure theories are traditionally stated in terms of nominal or. Theories of the term structure of interest rates finance essay. The liquidity premium theory of interest rates is a key concept in bond investing. Term structure theories are traditionally stated in terms of nominal or money interest rates. An overview of expectations theory of the term structure of inte rest rates.

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