The Term Structure of Interest Rates: Theory and Evidence from Government of Srilanka's Commercial Bank's Rates on Deposits

Interest rates are among the most closely watched variable in the economy, because they directly affect our everyday lives and have important consequences for the health of the economy. The relation between interest rates and the time to maturity of the debt for a given borrower in a given currency is called the Term Structure of Interest Rates. The term structure of interest explains how long-term interest rates relate to shortrun interest rates. The graphical presentation of such relationship is established through Yield Curve. Yield Curves are usually upward slopping. Occasionally it slopes down. This happens when the financial markets expect interest rates to fall. In this paper an attempt has been made to investigate such kind of relationship using three, six, twelve and twenty-four months Commercial Bank's Rates on Deposits for the economy of Srilanka.