Abstract

Estimating the makam yield curve and deriving forward interest rates from it as proposed in this study can provide investors and policy makers with important information about the expected short-term interest rate environment. Every yield curve, referred to in the literature as the term structure of interest rates, incorporates investors' expectations of the expected short-term interest rate with the addition of a risk premium for the uncertainty associated with those expectations. This derives from the fact that the yield curve is determined by the quality of the relation between yield to maturity and term to maturity. To discover this relation, series of bonds that differ only in their terms to maturity are sampled. This study, which is based on the Nelson-Siegel (1987) model that enables the yield curve to be estimated at any point in time, also affords strong consistency to the dynamics of the estimates obtained form the model.
Keywords: yield-to-maturity, forward interest rates, monetary policy, expectations and risk premium

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