Details

Technical Note

Note on Term Structure of Interest Rates & Yield to Maturity

Bashir A Khan, Naim Sipra

INDUSTRY : Investment

AREA : Finance

ORGANIZATION : N/A

LENGTH : 10

LUMS No : 02-166-89-2

PUBLICATION YEAR : 1989

KEYWORDS:

interest rates, yields, term structure, yield curves, maturities

DESCRIPTION:

The term structure of interest rates measures the relationship among the yields on securities of equivalent risk that differ only in their term to maturity. This phenomenon implies different rates of return for different maturities. By offering a complete schedule of interest rates across time, the term structure embodies the market's anticipation of future events, such as expectations about future inflation rates, or the impact of government monetary and fiscal policy. The term structure (the words "term structure" and "yield curves" are often used interchangeably) of interest rates is usually determined from yields on government securities of different maturities. The choice of government securities is made to keep the level of risk constant and it is the constancy, not the absence, of risk that is important. Consider, for example, the Golden Certificate of Deposit (GCD) scheme of the National Development Finance Corporation. Although these are not the same as government securities, they are guaranteed by the Government of Pakistan and can be treated as government securities.

LEARNING OBJECTIVES:

SUBJECTS COVERED:

Finance