Term Structure of Interest Rates

The term structure of interest rate give details the relationship between the term to maturity and interest rates and the differences between long term and short term interest rates.

The relationship among long and short interest rates is significant to corporate managers since:

1. They must decide where to buy long term or short term bonds and where to borrow via issuing short-term or long-term bonds.

2. It enables them to understand how short term and long term rates are concerned and what reasons the shift in their relative positions.

Some theories had been advanced to clarify the nature of yield curve - These are like:

• Liquidity preference theory
• Expectation theory
• Market segmentation theory