Term Structure Explanations

The yield curve can be observed, at least roughly, by looking at a series of bond quotes in the financial press, The curve is almost never flat but, rather, it usually slopes gradually upward as maturity increases. The spot rate curve has similar characteristics Typically it, too, slopes rapidly upward at short maturities and continues to slope upward, but more gradually as maturities lengthen It is natural to ask if there is a simple explanation for this typical shape Why is the curve not just flat at a common interest rate?

There are three standard explanations (or "theories") for the term structure, each of which provides some important insight We outline them briefly in this section


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