numberofwebsites,includingBloomberg,Yahoo,andCNNFinancial.Frominterest
rate data obtained from these sources, we can construct the term structure at a given
pointintime.Forexample,thetabularsectionbelowFigure1-6presentsinterestrates
fordifferentmaturitiesonthreedifferentdates.Thesetofdataforagivendate,when
plottedonagraphsuchasthatinFigure1-6,iscalledtheyield curveforthatdate.
The yield curve changes both in position and in slope over time. In March 1980,
all rates were relatively high, and since short-term rates were higher than long-term
rates, the yield curve was downward sloping.In October 2001, all rates had fallen, and
because short-term rates were lower than long-term rates, the yield curve was upward
sloping.In February 2000, the yield curve was humped—medium-term rates were
higher than both short- and long-term rates.
Figure 1-6 shows yield curves for U.S. Treasury securities, but we could have con-
structed curves for corporate bonds issued by Exxon Mobil, IBM, Delta Air Lines, or
any other company that borrows money over a range of maturities. Had we
The Term Structure of Interest Rates 37
FIGURE 1-6 U.S. Treasury Bond Interest Rates on Different Dates
Interest Rate
Term to Maturity March 1980 February 2000 October 2001
6 months 15.0% 6.0% 2.3%
1 year 14.0 6.2 2.4
5 years 13.5 6.7 3.9
10 years 12.8 6.7 4.6
30 years 12.3 6.3 5.5
Interest Rate
(%)
16
14
12
10
8
6
4
2
0
15 10 30
Years to Maturity
Short Term Intermediate
Term
Long Term
Yield Curve for March 1980
(Current Rate of Inflation: 12%)
Yield Curve for October 2001
(Current Rate of Inflation: 2.7%)
Yield Curve for February 2000
(Current Rate of Inflation: 3%)
An Overview of Corporate Finance and the Financial Environment 35
