Chapter 15 – The Term Structure of Interest Rates
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CHAPTER FIFTEEN
THE TERM STRUCTURE OF INTEREST RATES
CHAPTER OVERVIEW
This chapter describes the term structure of interest rates. One-year rates are used to develop yields on
LEARNING OBJECTIVES
After studying this chapter, the student should have a firm understanding of the concept of short-term and
PRESENTATION OF MATERIAL
15.1 The Yield Curve
This chapter opens with four sample yield curves (Figure 15.1). It is useful to spend some class
15.2 The Yield Curve and Future Interest Rates
The yield curve is developed from beliefs about interest rates in future time periods. Spot rates, short
15.3 Interest Rate Uncertainty and Forward Rates
We may not be able to determine future rates with certainty. If next year’s interest rate turns out to be
15.4 Theories of the Term Structure
Major elements of the Expectations Theory of term structure are presented in here. The expectations
Chapter 15 – The Term Structure of Interest Rates
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15.5 Interpreting the Term Structure
We need to ask what factors can account for a rising yield curve. Mathematically, if the yield curve is
rising, f n+1 must exceed y n. In other words, the yield curve is upward-sloping at any maturity date, n, for
which the forward rate for the coming period is greater than the yield at that maturity. If the yield curve is
15.6 Forward Rates as Forward Contracts
In general, forward rates will not equal the eventually realized short rate, or even today’s expectation of
what that short rate will be. But there is still an important sense in which the forward rate is a market
interest rate. The chapter concludes with an example of how forward rates are used in financial
engineering.
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