Different Interest Rates depending on Length of Loan

April 21st, 2007 | by admin |

The Term Structure of Interest Rates

All investment Carries uncertainty:

· Short Term Investment

With short term investment the uncertainty relates to income. The market value is unlikely to vary much because of the short term to maturity, but on maturity the income may vary. The short term investment enjoys capital certainty but income uncertainty.

· Long term investor

Income is assured for a long time but the market value of the investment may change a lot. The long term investor enjoys income certainty but capital uncertainty

Generally long-term interest rates are higher than short term interest rates because investors prefer capital certainty. The normal expectation for bonds can be shown using a yield curve

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