The cost of long-term borrowing is usually higher than the cost of short-term borrowing. The graph that shows the relationship between maturity and interest rates for U.S. Government’s borrowings (Treasuries) is called “term structure of the interest rates” or “the yield curve”. Shape of the yield curve is often used by economists to forecast future status of the economy.
- 1. Discuss why long-term rates are usually higher than short-term rates (upward yield curve)
- 2. Discuss under what economic conditions long-term rates might not be higher than short-term rates (flat or inverted yield curve).
- 3. Go to http://www.bloomberg.com, brows various links on the site, find the yield curve for the day of your search, and
- 4. Interpret your observation of the yield curve.