7

TIME VALUE WITH NONFLAT TERM STRUCTURE

The term structure of interest rates is the relationship between maturities (or term) and interest rates. Typically, longer-maturity debt has higher interest rates (a so-called rising yield curve), although the relationship between maturity and interest rates varies widely. In some cases, short-maturity interest rates are higher than long-maturity interest rates (a declining yield curve). Occasionally, interest rates rise over short maturities, reach a peak, and then decline for longer maturities (a humped yield curve). Declining yield curves and humped yield curves occur when interest rates are high by historical standards. This chapter discusses present value computations with nonflat term structures.