Question

choose a topic that relates to finance and write about it around two paragraphs and 3 citations

Answer 1

The term structure of interest rates is a representation of interest rates as a function of the time to maturity. So in this, we plot the yield to maturity of bonds against their term to maturity. Normally the shape of the curve is upward sloping suggesting that long term bonds should have higher yield to maturity owing to larger interest rate risks and liquidity risks also.

The term structure is good predictor of future economic activity and a upward sloping term structure suggests robust economic growth. While a downward sloping term structure is often a precursor to recession in the economy. A flat term structure is also unusual and suggests slowing of the economy as the expected inflation is near zero.

References:

1) Cox, J. C., Ingersoll Jr, J. E., & Ross, S. A. (2005). A theory of the term structure of interest rates. In Theory of Valuation (pp. 129-164).

2) Shiller, R. J., & McCulloch, J. H. (1990). The term structure of interest rates. Handbook of monetary economics, 1, 627-722.

3) McCulloch, J. H. (1971). Measuring the term structure of interest rates. The Journal of Business, 44(1), 19-31.