What does the term structure of interest rates define?

The term structure of interest rates depicts the relationship between the term to maturity of debt instruments, such as bonds, and their corresponding annualized yields. This concept is crucial for understanding how interest rates vary across different maturities, providing insights into market expectations regarding future interest rates, inflation, and economic conditions.

The yield curve, which is a graphical representation of the term structure, typically illustrates how yields change as the maturity of debt securities extends. In a normal upward-sloping yield curve, longer-term securities usually offer higher yields compared to short-term ones, reflecting the additional risk associated with greater uncertainty over longer time horizons.

Understanding the term structure helps investors make informed decisions about the timing of debt issuance or investment strategies, and it serves as a fundamental tool for analyzing economic trends and monetary policy implications. This makes option A the correct explanation of what the term structure of interest rates defines.