Fundamentals of Financial Management (Concise 6th Edition)

Chapter 6 Interest Rates 175

6-4 THE TERM STRUCTURE OF INTEREST RATES

The term structure of interest rates describes the relationship between long- and
short-term rates. The term structure is important to corporate treasurers deciding
whether to borrow by issuing long- or short-term debt and to investors who are
deciding whether to buy long- or short-term bonds. Therefore, both borrowers and
lenders should understand (1) how long- and short-term rates relate to each other
and (2) what causes shifts in their relative levels.
Interest rates for bonds with different maturities can be found in a variety of
publications, including The Wall Street Journal and the Federal Reserve Bulletin, and
on a number of web sites, including Bloomberg, Yahoo!, CNN Financial, and the
Federal Reserve Board. Using interest rate data from these sources, we can
determine the term structure at any given point in time. For example, the tabular
section below Figure 6-4 presents interest rates for different maturities on three
different dates. The set of data for a given date, when plotted on a graph such as
Figure 6-4, is called the yield curve for that date.

Term Structure of

Interest Rates

The relationship between

bond yields and

maturities.

Term Structure of

Interest Rates

The relationship between

bond yields and

maturities.

Yield Curve

A graph showing the

relationship between bond

yields and maturities.

Yield Curve

A graph showing the

relationship between bond

yields and maturities.

U.S. Treasury Bond Interest Rates on Di! erent Dates

F I G U R E 6! 4

INTEREST RATE

Term to Maturity March 1980 February 2000 January 2008

1 year 14.0% 6.2% 2.7%

5 years 13.5 6.7 3.0

10 years 12.8 6.7 3.7

30 years 12.3 6.3 4.3

0

0

Short

Term

Intermediate

Term

Long

Term

10 20 30

Yield Curve for

January 2008

Yield Curve for

February 2000

Yield Curve for

March 1980

Years to Maturity

2

4

6

8

10

12

14

16

Interest

Rate (%)