Question of the Week

Below is an example of US Treasury yields for various maturities:

6 month: 2.25%
1 year: 2.37%
2 year: 3.15%
5 year: 5.02%
10 year: 5.24%

The curve indicated by these yields is called _____.

a) inverted
b) normal
c) reverse
d) flat
e) treasury


Answer:

The correct answer is b.

A normal yield curve chart shows long-term debt instruments having higher yields than short-term debt instruments. Sometimes referred to as positive yield curve. The reason it is "normal" is because you would expect slightly more risk for holding a bond for a longer period of time because there is great risk of default.

An inverted yield curve is when long-term debt instruments that have lower yields than short-term debt instruments.


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