Financial securities that promise one or more fixed cash payments in the future are known as fixed interest securities. Examples include central government bills and bonds, local government (municipal) bonds, corporate bonds and mortgages. The rates of return offered on these various securities differ for a number of reasons, including the risk of default and the tax treatment of the promised payments. The term structure of interest rates describes the relationship between fixed interest securities that differ only in their time to maturity, that is, the length of time until the principal amount of the loan is repaid. The differences between interest rates for payments at different maturities reflect expectations about future interest rates and the preferences of investors.

Pure discount (zero coupon) bonds make a single cash payment at a fixed future date. The rates of return on pure discount bonds are the interest rates that make up the term structure. In many practical situations, the pure discount bond market does not cover the full maturity spectrum of all fixed interest securities, and sophisticated mathematical techniques are required to estimate the term structure. In addition, models have been developed to describe the behaviour of the term structure over time. Knowledge of the term structure is important for the accurate comparison of fixed interest securities, particularly newly issued securities against existing securities, and for understanding the future direction of general interest rate movements.