2. Meaning of TSIR
• Also known as Time structure or Maturity structure of IRs which plays a
central place in an economy
• Important concept because MP of a country also depends on it
• Indicative of future IRs
• When graphed, the TSIR is known as a yield curve
• Relationship between different rates of Interest i.e short term IR and long
term IR
• Functional relationship between the yield to maturity and the term to
maturity
• TSIR = f ( YM & TM )
• Higher the term leads to higher maturity value
3. 3 primary shapes of yield curves
• Normal or + ve Yield curve
• Inverted yield or – ve curve
• No variation or little
4. Factors determining TSIR
• Risk Preference
• Supply and Demand of Securities
• Expectations and Uncertainty
5. 3 Theories TSIRs
• Expectation Theory
• Market Segmentation Theory
• Liquidity Premium Theory
6. Expectation Theory
• Originally suggested by F A Lutz in 1940
• Later on explained by J R Hicks in 1946 in his book Value and Capital
• To ET, future IRs are principal determinant of present structure of IRs
• 2 forms of ET----
• Restrictive form----Unbiased or Pure ET
• Broad form
7. Assumptions of ET
• Perfect competition in the financial market
• Investors are rational
• Perfect foresight of all investors
• No transaction cost
• Adjustment between ST and LT IRs
• Perfect substitutes of securities of different maturities
9. Merit and Demerits
• Only Merit that it has emphasized the role of expectations.
• Demerits----
• Unrealistic assumptions
• Ignored informal and rural market
• Irrelevant with regard to IRs on bank deposits
• Efficiency of Central Bank is doubtful
• No explanation regarding determination of STIRs
• No explanation regarding the construction of Yield curve
