in our supply and demand analysis of interest rate behavior in chapter 4 we examined 638228

In our supply and demand analysis of interest rate behavior in Chapter 4, we examined the determination of just one interest rate. Yet we saw earlier that there are enormous numbers of bonds on which the interest rates can and do differ. In this chapter we complete the interest rate picture by examining the relationship of the various interest rates to one another. Understanding why they differ from bond to bond can help businesses, banks, insurance companies, and private investors decide which bonds to purchase as investments and which ones to sell. We first look at why bonds with the same term to maturity have different interest rates. The relationship among these interest rates is called the risk structure of interest rates, although risk, liquidity, and income tax rules all play a role in determining the risk structure. A bond”s term to maturity also affects its interest rate, and the relationship among interest rates on bonds with different terms to maturity is called the term structure of interest rates. In this chapter we examine the sources and causes of fluctuations in interest rates relative to one another and look at a number of theories that explain these fluctuations.