| With the issuance volume of government bonds increasing in recent years, there has achieved a great deal of developments in the Chinese bond market. The most prominent feature is more disciplined term structure of interest rates, which will benefit the central bank's open market operation. In China, bond market has received little attention for a long time and the research on the bond market is still weak. Considering of the latest researches in the world, this thesis focuses on the term structure of interest rates behavior in the Chinese bond market.Firstly, this thesis conducts a comprehensive survey on the development of the theory about term structure of interest rates. Then five methods to estimate interest rates of government bonds are comparative analysized. The implied term structure of Chinese bond's interest rates is estimated by the Nelson-Siegel model. Samples consist of spot rates with maturities of 3-month, 6-month, 1-year, 2-year, 3-year, 4-year, 5-year, 7-year and 10-year. Through principal components analysis, at least two factors are needed to capture the dynamics of the interest rates. The Kalman filter and maximum likelihood estimation procedure are utilized to estimate the two-factor gauss affine term structure model. The last chapter of this thesis combines the financial viewpoint with macroeconomic viewpoint of the short-term interest rates. It tries to reconcile these two viewpoints by relating the term structure factors obtained above to macroeconomic variables.Through these experiments, it is identified that the spot rates are normally distributed and two-factor model is sufficient to fit spot rates with maturities ranging from 3-month, 6-month, 1-year, 2-year, 3-year to 4-year time horizon. However, as for spot rates with maturities of 5-year, 7-year and 10-year, the results are inconclusive, especially between 1999 and 2004. The first state variable is related to the inflation rate, while the second state variable is related to the economic growth rate.
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