Study on comparison of interest rates between short term and long term financial debt securities

Abstract

The subject of interest rates forms an important area of study in macroeconomics. The behaviour of interest rates directly affect ease of access and cost of capital, consumer prices and the general cost of living. This study aims at comparing interest rates of short-term and long-term financial debt securities issued by the Kenya government through the central bank from the years 1993 to 2002. Secondly, it aims at determining any significant changes in the yield curve for the same period. The period of study l.e. 1993-2002 is a unique one because it was just after the financial liberalization. The research sample constitutes all short-term and long-term financial debt securities issued by the government during this period. The study shows that the average interest rate on short-term financial debt securities was higher than the average interest rate on long-term financial debt securities. This was at 21.636% and 16.10% for short term and long term financial debt securities respectively. The research further found a high dispersion on the short term mean rate, at a standard deviation of 13.916 while that on long term mean rate was 3.32. Its not difficult to see why this is so as the highest average interest rate was recorded at 84.67% and was recorded on the 91 days treasury bill in the month of July 1993. The lowest interest rate recorded was a low of 6.97%, recorded on the six-month treasury bill in April 1999. Both high and low were on short term interest rates. A downward sloping or inverted yield curve was obtained representing periods of very high interest rates. The result findings are consistent wJth the economic conditions that were prevailing during the period of study. It was a period of high inflation especially the early part of the period under study and a tighter monetary policy was introduced to try and mop-up excess liquidity in the economy.