Question

The term structure of interest rates

A. changes daily to reflect current competitive conditions in the money and capital markets.

B. plots returns for securities of different risk.

C. shows the relative interest rate spread between bonds with different risk ratings such as AAA, AA, A, BBB, and so on.

D. depicts interest rates for T-bills over the last year.

Answer 1

The term structure of interest rates is the relationship between the yields (or interest rates) on bonds of different maturities. It shows how interest rates vary over time, from short-term to long-term bonds. It is influenced by factors such as monetary policy decisions, inflation expectations, and market demand.

Step-by-step explanation:

The term structure of interest rates is the relationship between the yields (or interest rates) on bonds of different maturities. It shows how interest rates vary over time, from short-term to long-term bonds. The term structure of interest rates is important for investors as it affects their investment decisions and can provide insights into the future direction of interest rates.

For example, if the term structure is upward sloping, meaning long-term interest rates are higher than short-term interest rates, it suggests that investors expect higher inflation or higher borrowing costs in the future. On the other hand, if the term structure is downward sloping, it indicates that investors expect lower inflation or lower borrowing costs in the future.

The term structure of interest rates is influenced by various factors such as monetary policy decisions, inflation expectations, and market demand for different maturities and credit risks. It is not specific to any particular type of bond or rating.