What are term structure of interest rates?

The term structure of interest rates is like a recipe that shows how much you need to pay for borrowing money over different lengths of time.

Imagine you're going to borrow some candy from your friend. If you promise to return it tomorrow, they might only ask for one extra piece of candy as payment. But if you say you'll take longer, maybe a whole week, they might want more candy in exchange because they have to wait longer for their treat.

This idea is what the term structure of interest rates shows: how much more or less you pay for borrowing money, depending on how long you borrow it for.

Think of it like a ladder:

• The bottom rung is short-term borrowing (like a day or a month).
• The top rungs are long-term borrowing (like a year or even ten years).

Each rung has its own interest rate, the price you pay for borrowing. Sometimes the ladder goes up, meaning rates get higher for longer loans. Sometimes it slopes down, meaning short-term loans are more expensive.

By looking at this ladder, people can guess what might happen with money in the future, like if candy prices will go up or if your friend will be extra hungry next week!