Term structure of interest rates in Kenya: a review of evidence

Abstract

The term structure of interest rates refers to the relationship between interest and maturity period. This study examines the properties of term structure of interest rates. The subject of interest rates has dominated much of economic and business thinking in recent years both for academicians and practitioners. The term structure of Interest rates is an important mechanism for transmission of macroeconomic policies in any country. Through extensive review of theoretical and empirical literature, the study mainly examines the research findings validity of the expectations hypothesis. Attempt to review the premium preference theory, market segmented theory and the preferred habitat theory is also done. In conclusion the evidence from the literature supports expectations hypothesis that the forward rates have power to forecast future rates on the short run while studies surveyed strongly reject the expectations theory especially when the theory is tested in the long run.