Structure of Interest Rates
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Discuss the term structure of interest rates:
1) Supply versus demand of investment funds
2) Inflationary expectations
3) Risk characteristics
4) Yield curves
And the main thing: why it is important and in which component of the corporate financing it matters?
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Solution Summary
The solution discusses the structure of interest rates. The terms which are defined are: supple versus demand of investment funds, inflationary expectations, risk characteristics, and yield curves.
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Meaning of Term structure of interest rates
The "term structure" of interest rates refers to the relationship between bonds of different terms. When interest rates of bonds are plotted against their terms, this is called the "yield curve".
http://www.finpipe.com/termstru.htm as retrieved on 17 Dec 2006 12:47:07 GMT.
1) Supply versus demand of investment funds
This will affect the interest rates. For example tight monetary policy results in short term interest rates being higher than longer term rates. It's because of tightening of supply of money leads to increase in short term interest rate. This occurs as a shortage of money and credit drives up the cost of short term capital. Longer term rates can stay lower, if the investors see loosening of monetary policy in long term which will lead to the greater demand of long term bonds. Similarly if demand of fund is higher than it can lead to the increase in interest rates and vice versa.
2) Inflationary expectations
In economics, inflation is an increase in the general level of prices of a given kind. General inflation is referred to as a rise in the general level of prices. Impact of ...
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