AP MacroeconomicsMoney, Banking & Finance
Term Structure of Interest Rates
The term structure of interest rates is the relationship between bond yields and their time to maturity, visualized as the yield curve.
It shows how interest rates vary across short-, medium-, and long-term bonds of equal credit quality. Under the expectations theory, long-term rates reflect today's and expected future short-term rates, so an upward-sloping curve signals expected rate increases (often growth) and a downward-sloping (inverted) curve signals expected rate cuts (often recession). It is the analytical backbone of the yield curve.
Formula / Example
Expectations theory: (1 + long rate)^n ≈ product of (1 + expected short rates) over n periods