Reference no: EM132025318

Term structure of interest rate generally illustrates the relationship between short term and long term interest rates.

More specifically, it tells us the relationship of nominal interest rate on a default tree, pure discount bond with its rime to maturity, three factors that determine the shape of term structure are real rate of interest, inflation rate and interest rate risk.

Yield curve and term structure of interest rates are considered almost same things. However, both are different in the sense that yield curve is based upon Coupon Bond yields while- term structure is based upon Pure Discount Bonds with no coupon payments.

Due to this, shape of yield curve is dependent upon three additional factors other than those which construct term structure of interest rate.

Required: What are these three factors and why are these considered important to determine yield curve, however, irrelevant to term structure? Justify your answer by providing appropriate reasoning.

Post your GDB comments (answer) against GDB # 01 rather than against lessons' MDB.

Your discussion must be based on logical reasoning and to the point.

Avoid irrelevant discussion and unnecessary information