Final answer:
The statement that the 'term structure of interest rates' refers to the relationship between yields on debt and their maturities is true. This term structure is influenced by market participants' expectations of future interest rates, as well as various risks. The value of bonds is closely tied to market interest rates, with higher interest rates generally leading to lower bond prices, and vice versa.
Step-by-step explanation:
The term "term structure of interest rates" does indeed refer to the relationship between the yields on debt and their maturities. Thus, the statement is True. The term structure reflects how the bond market participants' expectations about future interest rates and their risk assessments impact interest rates for bonds of different maturities. Generally, bonds with longer maturities carry higher yields to compensate investors for the increased risk over a longer time horizon. This is often visualized through a yield curve, which plots bond yields against their maturities.
Bonds, being debt instruments, require the issuer to pay a fixed interest, referred to as the coupon, and repay the principal at the maturity date. The value of these bonds is significantly affected by the prevailing market interest rates. For example, if the market interest rate drops below the bond's coupon rate, the bond becomes more attractive because it pays a higher rate than new bonds being issued, leading to increased demand and a higher price for the bond. Conversely, if market interest rates rise, the bond's price would typically decrease.
Movements in interest rates are not isolated to individual types of bonds. As shown in Figure 17.5, the yields of different types of bonds such as 10-year Treasury bonds and AAA-rated corporate bonds tend to move in tandem. This is because the underlying market conditions affecting interest rates, such as changes in monetary policy or economic outlook, impact a wide range of bonds. However, the actual yield on these bonds can differ, with corporate bonds typically offering a higher yield than Treasury bonds to compensate for the higher default risk.