Normal Yield Curve


DEFINITION of 'Normal Yield Curve'

A yield curve in which short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality. This gives the yield curve an upward slope. This is the most often seen yield curve shape.

Sometimes referred to as "positive yield curve".


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BREAKING DOWN 'Normal Yield Curve'

This yield curve is considered "normal" because the market usually expects more compensation for greater risk. Longer-term bonds are exposed to more risks such as changes in interest rates and an increased exposure to potential defaults. Also, investing money for a long period of time means an investor is unable to use the money in other ways, so the investor is compensated for this through the time value of money component of the yield.

  1. Default

    1. The failure to promptly pay interest or principal when due. ...
  2. Default Risk

    The event in which companies or individuals will be unable to ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments ...
  6. Yield

    The income return on an investment. This refers to the interest ...
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