Final answer:
The term structure of interest rates, often represented by a yield curve, depicts the relationship between interest rates and the maturity of debt securities. It provides insights into market expectations of future interest rates and is typically constructed using U.S. government securities.
Option 'C' is the correct.
Step-by-step explanation:
The term structure of interest rates is a concept that is critical in the world of finance and economics. It refers to the relationship between interest rates and the maturity of debt securities. A common way to represent the term structure is through a yield curve, which plots interest rates of bonds of equal credit quality but different maturities.
Understanding the Term Structure of Interest Rates
The term structure of interest rates A. is often referred to as the yield curve. This yield curve provides a snapshot of how financial markets view the evolution of interest rates over time. It is important because it can influence various financial decisions, like investment strategies and borrowing costs.
The term structure B. depicts the relative level of short- and long-term interest rates. Typically, longer-term securities have higher interest rates to compensate for the increased risk of holding them over time, unless the market anticipates a decrease in rates in the future.
Moreover, the term structure C. is usually constructed with U.S. government securities of varying maturities. Government securities, such as Treasury bonds and bills, are used because they are considered free of default risk. Therefore, the yield curve based on these securities is reflective of the market's expectations for future interest rates without the risk of default complicating the picture.
In summary, D. All of the options A, B, and C described above are correct. The term structure illustrates how the maturity of debt influences interest rates, often using the U.S. Treasury securities as a benchmark for the risk-free rate.