Q&A: What are some relationships between different interest rates?

Question by Capitalist_pig: What are some relationships between different interest rates?

Are there any well known relationships between different interest rates?

For example: The 20-year T-Bond rate is usually 2% above 3-month T-Bills.

Stuff like that. Is there a website that would have things like that? It doesn't have to be just treasury security rates, it can be inflation rates, Federal Reserve interest rates, whatever.

Thanks




Best answer:

Answer by financegal27
Interest rates are basically a reflection of the riskiness of the investment. The reason the T-Bond is usually higher than the t-bill is due to the duration risk. Simply put if all things were equal most people would prefer to tie up their money for the least amount of time, so to encourage investors to tie up their money for 20 years as opposed to 3 months they must be compensated more for that risk.

Bond rates are traditionally ploted on a graph and called a yield curve. There are 2 main theories that address the yield curve of bonds. The first is called the liquidity preference theory, which is illustrated in the example above. The Liquidity preference theory states that investors are naturally inclined towards more liquid assets and to entice these investors into longer term, less liquid bonds you must compensate them by paying them a higher coupon payment. The second theory is called the expectation theory. According to the expectation theory investor expectations about the direction of future interest rates act as the force driving the yield curve. This is more widely accepted because it explains why the yield curve is often inverted with longer term rates lower than shorter term rates.

There is a great site that gets into some of these relationships that you'll probably find helpful.
http://www.pathtoinvesting.org/invchoices/bonds/yieldcrv/ic_yieldcrv_011.htm

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