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The chart shows an interest rate curve* that is upward sloping. This means that the rate of interest earned goes up as the term period for the deposit increases.
For a one year deposit, an investment of £100 will return £3.41. We discuss the cash flows the emerge from such deposits next.
The rates shown are Swap rates. What are Swaps? They are interest rate based instrument traded in the market that swap between fixed and floating cash flows. There is more on this you can learn later.For a two year deposit, again there is negative cash flow of £100 now (t=0).
But you get a £3.87 cash flow at the end of year one (t=1). Why 3.87? That is the interest rate for a two year deposit as shown in the table above. At the end of two years (t=2), your get your £100 back along with another £3.87.
Similarly for a three year deposit, there is negative cash flow of £100 now (t=0).
But you get a £4.20 cash flow at the end of year one (t=1) and year two (t=2). See the rates table above for the interest rate for a three year deposit. At the end of three years (t=3), you get your £100 deposit back and the interest of £4.20.
This pattern repeats for the four and five year deposits. The intermediate cashflows are determined by the interest rate for the four and five year terms respectively.
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