The term structure of interest rates refers to:[Fill in the blank]

Question

BlackTom AI · Accepted Answer

To approach this question, we need to parse what the phrase 'term structure of interest rates' means in finance.
Option a: 'Interest rates set by central banks' — This is about policy rates set by authorities, not the full term structure. The term structure concerns the entire pattern of rates across maturities, not just policy rates at a single point in time, so this is not correct.
Option b: 'The relationship between bond prices and credit ratings' — While bond prices are influenced by credit risk, the term structure focuses on how yields vary with time to maturity, not directly on credit ratings or price-yield relationships by credit quality. This misstates the scope of the concept.
Option c: 'Market interest rates across different maturities' — This captures the essence of the term structure: a representation of how interest rates (yields) differ for securities of varying maturities, reflecting expectations, liquidity, and risk premia across the horizon. This aligns with standard definitions.
Option d: 'The difference between nominal and real yields' — This relates to inflation-adjusted versus nominal yields, not to how rates change with maturity. It describes a component of yield, but not the term structure as a whole.
Therefore, the option that accurately describes the term structure of interest rates is the one about market rates across maturities, since it directly conveys the relationship of yields by term to maturity across the yield curve.

The term structure of interest rates refers to:[Fill in the blank]

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