 In this section we are going to talk about how the term to maturity affects the risk structure of the interest rate. So it has been observed that if we have multiple bonds, if we have several bonds and all of them have, for example, the same default risk, the same level of liquidity, the same tax treatment. And but at the same time we see that besides having all these factors equal, the interest rate or the yield which we get on different bonds is different. So the explanation is that it may be because of the difference in the term to maturity. It means how much time is left for each of these financial instruments to mature. So this particular aspect can also have a great impact on determining the values of the interest rates which you are going to get from investing in a certain financial instrument. So it is important to consider this aspect and we have got a very famous concept that is used to understand this particular aspect of the risk structure of the interest rates. And that concept is the concept of a yield curve. So we use the concept of yield curve to understand the effect of term to maturity or time to maturity on the interest rate. And this yield curve is basically a diagram on which you take yields, vertical axis and horizontal axis, you take the time period, how much time period of maturity is left, we assess that particular thing. And if we look at the various types of the yield curves that have occurred so far, there are three types of yield curves. One is your normal curve which is upward sloping. And then we have a horizontal straight line yield curve. And the third is the inverted yield curve which shows negative slope. And these three types of yield curves have implications. This means that overall economy progress is stagnant, it is moving towards recession. These three forms also mark this particular thing. So it is important to look at this particular aspect. And one more important thing is that all the websites of your financial data, like Yahoo Finance, or the financial data used to understand or download the financial data, the websites of the world that are famous, daily yield curves are calculated and posted on them. So investors assess this particular aspect because they are not only describing the situation of that day, the situation of the financial market, but they are describing the whole economy, going towards revival, going towards expansion, going towards growth, going towards recession or stagnant. They also explain this. So to explain the yield curve, I am going to illustrate a diagram. So these three forms of yield curves have been drawn here. I told you that normally the yield curve is upward sloping, which has been represented by the blue curve here. It shows that as you can see, we have taken the maturity on the horizontal axis. The yield, the rate of interest that you are going to get on the bond, that has taken along the vertical axis. So as you can see, if we are following the normal yield curve, upward sloping yield curve, it says that for the financial instruments or bonds having small maturity time period, such as short term bonds, for those who are getting yield or rate of interest, that is comparatively lower as compared to those financial bonds, those bonds whose maturity time period is longer. So if I, for example, have bond A which is of three months and bond B which is, for example, going to be mature in two years, in both cases, you are getting to see that the maturity time bond of the longer time period has a return on it. For example, R2 is the rate of interest offered on the bond which is three months mature. That is R1. R1 is smaller than R2. So this means that for the longer time period, if you invest, that is higher as compared to short term. So it is promising to invest for a longer time period. What will happen to that? You will get more money because, and the financial institution that has given you this particular bond issue, is hopeful that after a long time period, you will get a higher return on it. It means that overall, we can say that in this kind of economy where there is a normal or upward sloping yield curve, there is a revival or growth or an expansion. On the contrary, there can be a second situation where we can see that suppose the yield curve is your horizontal straight line, it is flat. This means that you are getting a certain rate of interest on the short term financial instruments. And for the long term, you are getting the same interest rate. This means that if you are investing in the mature bond of the longer time period, you will get the same return on it as you are investing in the short term. So this indicates that the companies that are issuing this particular bond or a specific corporation are not very hopeful that you will get a very high return on it. Therefore, in the future, things are not going to improve, they are going to stay the same. And that is why you will get the same level of interest offered for the long term or the short term. This particular shape of the yield curve indicates that the economy is going to stay at the same level. It will stay stagnant and growth will not come. Third possibility is the inverted yield curve, which we can also call the downward sloping yield curve. This yield curve indicates the recession. Recession means that people are not hopeful about the future. And the short term investment you are doing offers you higher interest rate. But as you are taking options for investment over the long term period, to invest the bonds, they are promising you lower interest rate. Because it is upside down from normal phenomenon. So we have said that the yield curve has been inverted and downward sloping. And this recession is showing that the issuer who has issued the corporate bond is not looking at the situation in the future. He is thinking that the situation is going to deteriorate. So the interest rate I am offering you is higher from the future. So give me the money right now so that you can invest with me. So that I can return you immediately after 3 months, 6 months, 9 months or 1 year. That will be relatively higher. So maybe he is trying to improve his financial position. And he wants to give you incentive to invest in the short term. Because he feels that things are not going to be good in the future. So he is not promising you that he will offer you a higher rate of return. If you invest in the bond for 2 or 5 years. So the long term bond is offering a lower rate of return as compared to the short term bond. Or in this case we can say that the yield curve is an inverted or downward sloping yield curve.