July 17, 2020
Simplest Introduction To Learn Yield Curve-1
What is the Yield Curve?
The yield curve is an indicator to have an idea about future interest rate changes and economic activity. The yield curve is a line that provides the graphical representation of bonds having equal credit quality but different maturity dates. This is a measurement to evaluate risk and the impact on returns of investments. There are three primary yield curve shapes which are normal, inverted, and flat.
Normal yield curve is an up-sloped yield curve which means the yield on longer-term bonds may keep rising. The longer maturity bonds have a higher yield compared to shorter-term bonds. (See the chart below)
Inverted yield curve is a down-sloped yield curve that the longer-term bonds may keep falling. The shorter-term bonds have a higher yield compared to longer-term bonds.
Flat yield curve will happen when economic conditions change. When the economy is the transition to slower development, the yields on longer-maturity bonds tend to fall and yields on shorter-term securities likely rise, the normal yield curve into a flat yield curve.
How does Yield Curve work?
The yield curve provides a benchmark for other debt in the market and predicts changes in economic output and growth. The yield curve usually compares the three months, two years, five years, 10 years, and 30 years of U.S. Treasury debt. The normal yield curve indicates a sign of economic expansion. The inverted yield curve indicates the upcoming recession and the flat yield curve is predicted by the economic transition.
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