Yield curve

Definition

The yield curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the relationship between short-term and long-term bond yields issued by the same entity.

5 Must Know Facts For Your Next Test

1. A normal yield curve slopes upward, indicating higher interest rates for longer-term bonds.
2. An inverted yield curve slopes downward, often seen as a predictor of economic recession.
3. The shape of the yield curve can influence investment decisions and monetary policy.
4. Yield curves can be constructed using government bonds, corporate bonds, or other fixed-income securities.
5. Factors such as inflation expectations, economic growth forecasts, and central bank policies impact the shape of the yield curve.

Review Questions

• What does an inverted yield curve typically indicate about future economic conditions?
• How does the shape of the yield curve affect investors' decisions?
• What factors can cause changes in the shape of the yield curve?

Related terms

Bond: A fixed-income instrument representing a loan made by an investor to a borrower.

Interest Rate Risk:

The risk that changes in interest rates will affect bond prices inversely.

Term Premium: The additional return that investors demand for holding longer-term securities.