The yield curve is a graphical representation of the term structure of interest rates. The graph to the right is a pictorial representation of the yield curve for U.S. government securities. Yields fall as maturity lengthens. Yields remain constant as maturity lengthens.
Yields rise as maturity lengthens.
Hypothesis A demand-side approach, which assumes lenders have a time preference theory of consumption and that they prefer a dollar today to a dollar tomorrow. The longer the maturity on the loan, the greater the opportunity cost. Therefore, to induce lenders to lengthen the maturity on their loans, yields must be higher on longer-term maturities to compensate them for the lost opportunity of current consumption. This hypothesis does not explain inverted yield curves. Therefore, the shorter the maturity the larger the supply of loanable funds and the lower the short-term interest rate.