Term Structure Of Interest Rates

a.k.a
Yield Curve
By:
Esha khurana
Eric joseph
Dion
Lokesh
• Definition : how yield to maturity (YTM) is
related to term to maturity for bonds that are
similar in all respects, excepting maturity.
• YTM : interest rate at which present value of
cash flows receivable from bond are equal to
bond value.
 Example
Face value Interest rate Maturity (yrs) Current price Yield to
maturity

100000 0 1 88968 12.40

100000 12.75 2 99367 13.13

100000 13.50 3 100352 13.35

100000 13.50 4 99706 13.60

100000 13.75 5 99484 13.90

 YTM (%)
14.5

14

13.5
YTM (%)
13

12.5

12

11.5
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
 What to interpret?
• Information on expected future short term
rates can be implied from yield curve
• Theories:
1. expectations theory
2. liquidity preference theory
3. preferred habitat theory
4. market segmentation theory