Tests of Term Structure of Interest Rates Theories

Various tests have been conducted mainly in USA and they show that all the three (3) theories have some validity and therefore the shape of the yield curve of any firm is affected with the following as:

1. Demand and Supply conditions in the long and short term market.

2. Liquidity preferences of borrowers and lenders

3. Expectation of future inflation. While any type of the three (3) factors may lead the market all the three (3) effect the term structure of interest rate.

Factors influencing interest rates

There are four (4) main significant factors that influence interest rates and the shape of yield curve.

1. CBK - Monetary policy

2. Business activity or circle in the economy

3. Balance of trade position

4. The level of government budget deficit