The Term Structure of Interest Rates

This paper consolidates and interprets the literature on the term structure, as it stands today. Definitions of rates of return, forward rates and holding returns for all time intervals are treated here in a uniform manner and their interrelations, exact or approximate, delineated. The concept of duration is used throughout to simplify mathematical expressions. Continuous compounding is used where possible, to avoid arbitrary distinctions based on compounding assumptions. Both the theoretical and the empirical literature are treated. The attached tables by J. Huston McCulloch give term structure data for U. S. government securities 1946-1987. The tables give discount bond yields, forward rates and par bond yields as defined in the paper. The data relate to the concepts in the paper more precisely than does any previously published data series.