term structure of interest rates
The term structure of interest rates refers to the relationship between interest rates and the time to maturity of debt securities, like bonds. Typically, longer-term investments offer higher interest rates to compensate for increased risks, such as inflation or economic changes over time. This relationship is often represented by a graph called the yield curve, which shows the interest rates for bonds of different maturities. Understanding the term structure helps investors make decisions based on expected future interest rates and economic conditions.
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The term structure of interest rates describes how interest rates vary for different loan durations, ranging from short-term to long-term. Typically, longer-term loans have higher rates due to increased risk over time, such as inflation or changes in the economy. This relationship is often depicted in a yield curve, which visually represents these rates. A normal upward-sloping curve indicates that longer maturities yield higher rates, while an inverted curve, where short-term rates are higher, may signal economic uncertainty. Understanding this helps investors and policymakers make informed decisions about borrowing and lending.