Term Structure Models

Term structure models are financial tools that explain how the interest rates of bonds change based on their time to maturity. They illustrate the relationship between the duration of an investment and the interest rate offered. Generally, longer-term bonds yield higher interest rates as they carry more risk over time. These models help investors understand how economic factors, like inflation and monetary policy, influence interest rates, aiding in decision-making regarding investments and risk management. Essentially, they provide a framework to predict future interest rates based on current economic conditions and expectations.