What Is the Difference Between Term Structure and a Yield Curve?

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There is no difference between term structure and a yield curve; the yield curve is simply another name to describe the term structure of interest rates.

What Is the Term Structure of Interest Rates?

The term structure of interest rates is a graph that plots the yields of similar bonds in the Y-axis with the maturities, or time, in the X-axis.

The reason why the term structure of interest rates and a yield curve are the same is because the graph of the term structure of interest rates literally plots different yields being offered by bonds of different maturities. The term structure of interest rates can take one of three yield curve shapes: normal, inverted, or flat.

A normal yield curve means that as the maturity of the bonds increases in time, so do the yields, creating a convex shape.

An inverted yield curve means short-term yields are higher than long-term yields, and the curve slopes downward in a concave fashion. This means yields and maturities are negatively inverted.

A flat yield curve means there is little or no variation between yields and maturities, and all maturities have similar yields. This makes the yield curve parallel to the X-axis.

Why Does the Term Structure of Interest Rates Matter?

Generally, the term structure of interest rates is a good measure of future economic growth expectations. If there is a highly positive normal curve, it is a signal investors believe future economic growth to be strong and inflation high. If there is a highly negative inverted curve, it is a signal investors believe future economic growth to be sluggish and inflation low. A flat yield curve means investors are unsure about the future.

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A deposit broker is a person or company tasked with placing financial deposits at a depository institution on behalf of a third party.

A variable rate demand note is a debt instrument that represents funds that are payable on demand and accrue interest based on the money market rate.

A war bond is is a form of government debt that seeks to raise capital from the public to fund war efforts.

A payment-in-kind bond is a type of bond that pays interest in additional bonds rather than in cash. PIK bonds are typically issued by companies facing financial distress.

Industrial revenue bonds are municipal debt securities issued by a government agency on behalf of a private sector company and intended to build or acquire factories or tools.

An agency bond is a debt security issued by a federal government department or by a government-sponsored enterprise such as Freddie Mac or Fannie Mae.

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