ABSTRACT
This chapter assumes that all possible investments are of equal risk so that the prime consideration is the absolute level of return. It is necessary to understand about the structure of interest rates. In the wholesale markets, interest rates are usually quoted as a set rate for a given period, with interest paid at the end of that period. For longer dated instruments the best method of comparing them is to calculate the yield to maturity. Instruments are considered comparable if they have similar characteristics and there are two main issues, credit risk, and liquidity risk. The basic shape of the yield curve represents general terms what the market is expecting to happen to interest rates. When preparing a yield curve, it is important to ensure that only securities that have comparable credit and liquidity features should be compared. There are three main shapes of the yield curve, normal or positive, flat, and negative or inverse.
