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To what extent do alternative theories of the term structure of interest rates explain observed yield curves? What role does the term structure play in the transmission of monetary policy instruments to targets of economic policy?
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To what extent do alternative theories of the term structure of interest rates explain observed yield curves? What role does the term structure play in the transmission of monetary policy instruments to targets of economic policy? A yield curve shows the yield to maturity on bonds with differing terms to maturity but the same risk, liquidity and tax considerations. The yield to maturity (YCM) is the fixed interest rate which equates the present value of future payments received with the bond's value today. For example, the YCM for a simple discount bond which pays off a face value of £1000 in one years time with a current price of £900 is equal to 11.1%. There are three stylised facts about the yield curve which alternative theories of the term structure of interest rates (i.e. the relationship among interest rates on bonds with different terms to maturity) try to explain: 1. There is...
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