Forward interest rates and swaps

Term structure of interest rates
The term structure of interest rates is determined in part by expectations of future
short-term interest rates, exchange rates, inflation, and the real economy, and
therefore provides information on these expectations. Unfortunately, most of the
term structure of interest rates is unobservable, in contrast to prices of most assets,
such as spot exchange rates or stock-index futures, prices of which are directly
observable. The term structure is difficult to describe because fixed-income investments
differ widely in the structure of their cash flows. Any one issuer will have debt
outstanding for only a relative handful of maturities. Also, most bonds with original
maturities longer than a year or two are coupon bonds, so their yields are affected
not only by the underlying term structure of interest rates, but by the accident of
coupon size.