published

by the government; some interest rates are quoted as a percentage

above or below the prime rate.
In the United States, the prime rate has typically run 3 percentage points, or
300 basis points for those of you wishing to sound financially sophisticated,
above the target federal funds rate set by the Fed.

Why You Should Care

Most people don’t care as much about prime rates as they did ten to twenty
years ago, although they are still used as a benchmark for change. Today, the
Fed funds rate, Treasury bill and bond rates, and mortgage rates are more
broadly accepted measures of interest rates and interest rate direction.

23. YIELD CURVE

Economists and others in the financial community use the yield curve to plot the
relationship between yield, or interest rate return, and maturity, or length of time
a debt security is held. The most frequently reported yield curve compares the
three-month, two-year, five-year, and thirty-year U.S. Treasury debt.
Generally speaking, the longer a debt security is held, the higher the interest
rate. That’s because of the greater opportunity costs and the greater risks,
including inflation, over the longer time period (see #21 Interest Rates). But
depending on economic circumstances and central bank policy, the relationship
between yield and maturity can change or even reverse. So economists watch
yield curves closely for signs of economic health, and financial professionals
watch the curve for signs of preference for different kinds of debt securities,
such as mortgage rates or bank lending rates.

What You Should Know

The normal yield curve (Figure 3.2) shows rates gradually rising as maturity
lengthens. This curve can be steeper if investors see more risk in longer-term
securities, typically in inflationary times or times where other risk factors like