The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Term Structure of Interest Rates

  • Burton G. Malkiel
Reference work entry


The term structure of interest rates concerns the relationship among the yields of bonds that differ only with respect to their terms of maturity. This article explains the three traditional explanations of the term structure. (1) The expectations theory considers the long rate to be an average of current and future short rates. (2) The liquidity-preference theory posits that illiquid, risky long-terms bonds must yield a premium over expected short rates. (3) The hedging-pressure theory stresses the influence of the preferred habitats of different investors. A survey of empirical work on the term structure including affine yield models concludes.


Affine models of the term structure Bonds Central banks Expectations theory Expectations-forming mechanisms Fisher, I. Greenspan, A. Hedging-pressure theory Hicks, J. Inflation Interest rates Liquidity premium Liquidity-preference theory Long-term interest rates Lutz, F. No-arbitrage condition Preferred habitat theory Risk premium Short-term interest rates Term structure of interest rates Yield curve 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Burton G. Malkiel
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