subject: Structured Investments Structured Investments [print this page] First of all, we need some important background information about interest rates. Typically, short-term interest rates are lower than long-term interest rates (think of the rate on a 15-year mortgage vs a 30-year mortgage). This is because there is less risk to the lender in a short period of time than in a long period of time. A lot can happen to the borrower during those extra 15 years. That's twice as much time for the borrower to lose a job, become ill or have any number of other possible life events that make it difficult or even impossible to pay back the loan. Therefore, for two loans that are similar in every other way, the one that has the longer payback period will have the higher interest rate.First of all, we need some important background information about interest rates. Typically, short-term interest rates are lower than long-term interest rates (think of the rate on a 15-year mortgage vs a 30-year mortgage). This is because there is less risk to the lender in a short period of time than in a long period of time. A lot can happen to the borrower during those extra 15 years. That's twice as much time for the borrower to lose a job, become ill or have any number of other possible life events that make it difficult or even impossible to pay back the loan. Therefore, for two loans that are similar in every other way, the one that has the longer payback period will have the higher interest rate.
