DEFINITION of 'Yield Curve Risk'
The risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument. The risk is associated with either a flattening or steepening of the yield curve, which is a result of changing yields among comparable bonds with different maturities.
When market yields change, this will impact the price of a fixedincome instrument. When market interest rates, or yields, increase, the price of a bond will decrease and vice versa.
INVESTOPEDIA EXPLAINS 'Yield Curve Risk'
When the yield curve shifts, the price of the bond, which was initially priced based on the initial yield curve, will change in price. If the yield curve flattens, then the yield spread between long and shortterm interest rates narrows, and the price of the bond will change accordingly. If the bond is a shortterm bond maturing in three years and the threeyear yield decreases, the price of this bond will increase.
If the yield curve steepens, this means that the spread between long and shortterm interest rates increases. Therefore, longterm bond prices will decrease relative to shortterm bonds. Changes in the yield curve are based on bond risk premiums and expectations of future interest rates.

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