Description

The interest rate for each bond with a different maturity is determined by the supply of and demand for that bond, with no effects from expected returns on other bonds with other maturities.

The interest rate on a long$-$term bond will equal an average of the short$-$term interest rates that people expect to occur over the life of the long$-$term bond.

When short$-$term interest rates are low, yield curves are more likely to have an upward slope; when short$-$term interest rates are high, yield curves are more likely to slope downward and be inverted.

The interest rate on a long$-$term bond will equal an average of short$-$term interest rates expected to occur over the life of the long$-$term bond plus a liquidity premium $($also referred to as a term premium$)$ that responds to supply and demand conditions for that bond.

$756$ PM

$7/77/$C$025$