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Yield Curves

In: Financial Markets Efficiency and Economic Behaviour

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  • Gian Maria Tomat

    (Bank of Italy)

Abstract

The term structure of interest rates is the relation between the yields of fixed income securities with different maturity. The securities used to compile the yield curve are normally government bonds. The expectations hypothesis states that long rates should be equal to expected average forthcoming short rates. Moreover, forward rates should reflect expectations of future spot rates. Forward rates result from trade between short and long term bonds and are either greater or lower than the spot rates with the same term, when the yield curve is respectively upward or downward sloping. The rollover term premium is the difference between the long rate and expected average short rates, conditional on information available in any time period. The holding period term premium is the difference between the expected holding period return and the spot rate. The forward term premium is the difference between the forward rate and the expected future spot rate.

Suggested Citation

  • Gian Maria Tomat, 2023. "Yield Curves," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Financial Markets Efficiency and Economic Behaviour, chapter 0, pages 77-92, Palgrave Macmillan.
  • Handle: RePEc:pal:pmschp:978-3-031-36836-3_6
    DOI: 10.1007/978-3-031-36836-3_6
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