How do Risk and Term Structure Affect Interest Rates (1980 words)

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Topic: How do Risk and term structure affect interest rates

The paper should contain each of the following elements:
1) A statement of what you intend to research
2) A hypothesis about what you think you will find in the literature regarding the topic
3) A review of the current literature on the chosen topic
4) A summation of what other authors have written or researched regarding the topic
5) Your own response detailing what you learned about the topic after researching it. For example: Were your original ideas about the topic confirmed by the research? If not, why do you think they were not?
The length of the paper should equal approximately 7 - 10 typed, double spaced pages with one-inch margins, and font size no larger than12 point (No less than 1,800 words). If you choose, the paper can be longer in length but not shorter.
A cover page, with the title of your paper, your name, and the date. The paper must APA guidelines.

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Introduction
The main aim of investing has been to maximize the returns associated with the investment and minimize the risk. However, risk and return go together and higher return securities are associated with higher risks also. Therefore, the aim of investors has been to optimize the risk-return characteristics of the portfolio. There are a large variety of assets which are available for investment purposes such as stocks, bonds, commodities, real estate, etc. Bonds are generally associated with fixed return commitments and they provide return in the form of interest and principal repayment. Bonds are thus considered to be less risky than stocks. In this paper, the components of the return of the bonds have been analyzed. The riskiness of the bonds and the term structure of interest rates have a significant influence on the bond return and these factors have been analyzed in detail.

Statement of research
Bonds are considered to be safer investments than stocks. This paper seeks to assess whether all types of bonds are safer than stocks or there are some bonds which can be considered to be safer than stocks and other investment assets. The paper also seeks to address whether changes in the interest rates affects all bonds with all types of maturities in the same manner. As an example, if the interest rates increase by 1%, all rates should increase by 1% only. However, the practical evidence of this hypothesis would be examined to check this hypothesis....
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