The __________ component of the term structure does not inﬂuence the shape of the term structure, rather it affects the overall level of interest rates.

Question

Quizplus · Accepted Answer

The real rate of interest, which represents the compensation that investors demand for deferring consumption, is not affected by factors that influence the shape of the term structure. Instead, it reflects the underlying supply and demand forces for loanable funds, and it should be similar across maturities. As such, changes in the real rate will affect all interest rates proportionally, resulting in a parallel shift of the entire term structure.

The __________ Component of the Term Structure Does Not Inﬂuence