The ________ of the term structure of interest rates states that the interest rate on a long -term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond, and investors have no preference for short-term bonds relative to long-term bonds.

The risk and term structure of interest rates is the relationship between the interest rates of bonds with different varieties but similar maturity structures. The risk structure, also known as the risk premium, explains the probability of a borrower being able to service their debts. The term structure of interest rates is the market interest rates on bonds with different lengths of time to maturity but with the same or similar risk.  The risk structure of interest rates is made up of three main components that affect interest rates: Default, Liquidity, and Taxes.  The risk structure of... Show more

The risk and term structure of interest rates is the relationship between the interest rates of bonds with different varieties but similar maturity structures. The risk structure, also known as the risk premium, explains the probability of a borrower being able to service their debts. The term structure of interest rates is the market interest rates on bonds with different lengths of time to maturity but with the same or similar risk. 

The risk structure of interest rates is made up of three main components that affect interest rates: Default, Liquidity, and Taxes. 
The risk structure of interest rates can help you understand why yields on different types of bonds differ. It can also help you predict the changes in rank order as well as the spread (or difference in yield) between different types of bonds. 
The term structure of interest rates is important because it helps to explain how changes in short-term interest rates impact the level of long-term interest rates in an economy.
 

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