THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 165

CHAPTER The Risk and Term Structure of Interest Rates 133 Interest Rate (%) 16 14 12 January 1990 10 September 1986 March 1998 January 2009 2 5 10 15 20 Terms to Maturity (Years) FIGURE 6-7 Yield Curves for Government of Canada Bonds, 1986 2009 Source: Statistics Canada CANSIM II Series V122531, V122532, V122533, V122538, V122539, V122540, V122543, and V122544, and the authors calculations The upward-sloping yield curve in January 2009 indicates that short-term interest rates would climb in the future The long-term interest rate is above the short-term interest rate when short-term interest rates are expected to rise because their average plus the liquidity premium will be above the current short-term rate The moderately upward-sloping yield curve in September 1986 indicates that short-term interest rates were expected neither to rise nor to fall in the near future In this case, their average remains the same as the current short-term rate, and the positive liquidity premium for longer-term bonds explains the moderate upward slope of the yield curve A PP LI CATI O N Using the Term Structure to Forecast Interest Rates Interest-rate forecasts are extremely important to managers of financial institutions because future changes in interest rates have a significant impact on the profitability of their institutions Furthermore, interest-rate forecasts are needed when managers of financial institutions have to set interest rates on loans that are promised to customers in the future Our discussion of the term structure of interest rates has indicated that the slope of the yield curve provides general information about the market s prediction of the future path of interest rates For example, a steeply