Interest rates are intertemporal prices of money. They are the price a saver charges for postponing consumption and making resources available to others. Interest rates are normally expressed in an annual percentage rate charged on the loan notional, the amount loaned. The interest charged on a loan will depend on such factors and maturity (length in years), notional (size of loan), credit worthiness (solidity of borrower) and availability of capital (how much saving is made available by savers).
The relationship between maturity and interest rates is described by what is known as the interest rate curve or yield curve. The shape of this curve is the focus of much research and market commentary. A traditional view is that what is known as the time value of money is positive, meaning people value money (consumption) now over later. This should mean that the interest rate curve is positively sloped, where interest rates for longer maturities are higher than for shorter maturities, all else being equal. However, in reality interest rate curves come in many shapes, often being downward sloping or humped. The theory known as preferred habitat suggests this may be caused by different investors having a preference for specific maturities (for example pension funds buying long-dated bonds to match their long-dated pension liabilities), and accepting a lower return to attract a supply of lenders to their preferred investment maturities. Another theory is that longer dated interest rates are reflections of expectations to short term rates in the future. An upward sloping yield curve suggests that the market expects interest rates to be higher in the future. This is certainly true for the front end of the curve (normally thought of as maturities under 2 years), but it is unreasonable to expect that the market has much idea of where short term interests will be in 20 or 30 years, so the theory holds little power to explain the shape of the yield curve for longer maturities.
Learn more about the mechanics of yield curves and how interest rates are traded in the market in our Members Area.