Term Structure of Interest Rates

The term structure of interest rates is the relationship between the yield to maturity and the time to maturity for pure discount bonds.  For example, the yield on a one-year bond might be 4% while the yield on a 30-bond is 6%.  The yields differ for several reasons, including differences in risk for short-term and long-term investments and differences in expectations about future interest rates.

The term structure of interest rates is of fundamental importance in macroeconomics because monetary policy affects short-term interest rates, but investment depends on long-term interest rates.  Theories about the term structure of interest rates thus become theories about the connection between monetary policy and investment.