Introduction

On today’s asset markets, investors can choose among a wide range of debt instruments with distinct effective yields. In particular, interest rates differ for different terms, that is, times until maturity. The relationship between term and interest rate is called the term structure of interest rates. Usually, the longer the term, the higher is the effective yield, and the term structure is rising. However, sometimes the converse occurs, and yields for long term instruments are lower than those for short term instruments, implying declining or humped term structure shapes. It is therefore important to understand why the term structure can have these different forms and how various factors influence te term structurhe of interest rates.