Yield Curve


DEFINITION of 'Yield Curve'

A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

Yield Curve


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The shape of the yield curve is closely scrutinized because it helps to give an idea of future interest rate change and economic activity. There are three main types of yield curve shapes: normal, inverted and flat (or humped). A normal yield curve (pictured here) is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A flat (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates.

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  4. What are the different formations of yield curves?

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  5. How can I create a yield curve in Excel?

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  6. In what ways can a sinking fund affect bond returns?

    The effective yield of a bond sinking fund to an investor should not be considered similar to a bond nonsinking fund. Both ... Read Full Answer >>
  7. What is a barbell fixed-income strategy?

    A barbell fixed-income strategy is an investment strategy in which a portfolio is comprised of long- and short-term bonds. ... Read Full Answer >>
  8. How do interest rates affect a bond's coupon rate?

    A bond's coupon rate is directly affected by national interest rates, and consequently, so is its market price. Newly issued ... Read Full Answer >>
  9. What does market segmentation theory assume about interest rates?

    Market segmentation theory states there is no relationship between the markets for bonds of different maturity lengths. MST ... Read Full Answer >>
  10. What does the yield curve actually predict?

    Technically speaking, the yield curve does not make predictions. Rather, it is just a way of representing a set of interest ... Read Full Answer >>
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