Question1.20 The term structure of interest rates refers to:Select one alternative: the relationship between the yield to maturity and bond price. the relationship between the yield to maturity and bond term to maturity. the relationship between the yield to maturity and bond duration. None of the above options are correct. the relationship between the term to maturity and bond duration. ResetMaximum marks: 2.5 Flag question undefined

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BlackTom AI · Accepted Answer

Understanding what the term structure of interest rates refers to requires focusing on the core relationship it describes in bond mathematics.
Option 1: 'the relationship between the yield to maturity and bond price.' While yield and price are linked through discounting, the term structure specifically maps yields across maturities, not the price-yield linkage at a single point. So this mixes two concepts without capturing the term-structure focus.
Option 2: 'the relationship between the yield to maturity and bond term to maturity.' This aligns with the standard definition: the term structure describes how yields (to maturity) vary with the time to maturity of debt instruments. It directly ties maturity length to expected yields.
Option 3: 'the relationship between the yield to maturity and bond duration.' Duration is a measure of a bond's price sensitivity to interest rate changes, not the central object of the term structure. The term structure concerns maturity and yields, not duration as its primary axis.
Option 4: 'None of the above options are correct.' Given that option 2 accurately states the concept, this choice is incorrect.
Option 5: 'the relationship between the term to maturity and bond duration.' This option confuses the axis of the term structure (yield versus time to maturity) with duration, which is not the defined relationship describing the term structure.
In summary, the precise concept is captured by option 2, since the term structure of interest rates maps yields to different maturities, illustrating how yields vary with term to maturity rather than with price, duration, or an unspecified combination.

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