Introduction to Finance

Figure 8.2
shows yield curves for March 1980, October 2006, October 2008, December 
2012, and December 2015 refl ecting the plotting of the corresponding data in Table 8.3. 
Because of high infl ation rates and monetary policy attempting to constrain economic activity, 
the March 1980 yield curve was both downward sloping and at very high overall interest rate 
TA B L E 8 . 3
Interest Rates for Treasury Securities by Term to Maturity at Selected Dates
Term to 
Maturity
March 
1980
November 
2001
October 
2006
October 
2008
December 
2012
December 
2015
6 months
15.0%
1.9%
4.9%
0.2%
0.11%
0.50%
1 year
14.0
2.2
5.0
0.4
0.16
0.65
5 years
13.5
4.0
4.7
2.3
0.72
1.70
10 years
12.8
4.7
4.7
3.4
1.78
2.24
20 years
12.5
5.3
4.9
4.2
2.54
2.61
30 years
12.3
5.1
4.9
4.2
2.95
2.97
Source: 
Selected Interest Rates
, Board of Governors of the Federal Reserve System, http://www.federalreserve.gov.
Interest Rate %
March 1980
December 2012
December 2015
October 2006
October 2008
2
4
6
8
10
12
14
16
1
5
10
Years to Maturity
20
30
FIGURE 8.2
Yield Curves for 
Treasury Securities at Selected 
Dates
Source: 
Selected Interest Rates
, Board of Governors of the Federal Reserve System, http://www.federalreserve.gov.

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8.4 Term or Maturity Structure of Interest Rates
205
levels. Although not plotted, the yield curve for November 2001 was upward sloping and 
much lower overall due to lower expected infl ation rates and eff orts by monetary policy to 
stimulate economic activity.
By October 2006, the yield curve was nearly fl at across all maturities with a variation 
only between about 4.7 percent and 5.0 percent. This fl attening of the yield curve was 
attributable primarily to the Fed’s eff ort to raise short-term interest rates as a way of combat-
ing the possibility of increases in infl ation rates. As the fi nancial crisis of 2007–08 developed 
and was followed by the 2008–09 recession, short-term interest rates were forced to low 
levels, as depicted for October 2008. The yield curve for December 2012 shows interest rates 
on Treasury securities at historically low levels due to the monetary easing policies of the 
Fed, including its quantitative easing eff orts. The yield curve at the end of December 2015, 
while very similar to the December 2012 yield curve, had higher short-term interest rates 
consistent with the Fed raising its interest rate target for the federal funds rate.
Relationship Between Yield Curves and the Economy
Historical evidence suggests that interest rates, generally, rise during periods of economic 
expansion and fall during economic contraction. Therefore, the term structure of interest 
rates, as depicted by yield curves, shifts upward or downward with changes in economic 
activity. Interest rate levels, generally, are lowest at the bottom of a recession and highest at 
the top of an expansion period. Furthermore, when the economy begins to recover from a 
recession, the yield curve typically slopes upward. The curve begins to fl atten out during the 
latter stages of an expansion and, typically, starts sloping downward when economic activity 
peaks. As the economy turns downward, interest rates begin falling and the yield curve again 
goes through a fl attening-out phase, to become upward sloping when economic activity again 
reaches a low point.
Term Structure Theories
Three theories are commonly used to explain the term structure of interest rates. The