What Is the Yield Curve?
The Yield Curve is a plot of the interest rates for particular types of bonds with different terms to maturity. The upward slope line graph representing the relation between market interest rate and the time the financial securities take to mature are yield curves.
It is a line graph of how interest rates vary with different maturities of security as viewed at a single point in time. According to this curve, the bonds and securities with a longer maturity will have higher profits. Usually, the horizontal axis - “x” signifies “maturity” and the vertical axis - “y” signifies the “yield”. To express it mathematically -
Interest rate ∝ Maturity term
(The market remuneration and the times remaining for the securities to reach maturity is directly proportional)
U.S. Treasury reports that these curves frequently compare the three-month, two-year, five-year, 10-year, and 30-year maturities with the yield interest rate in a graph. The profits get bigger as the maturity term stretches longer.
Types of Yield Curves
There are three distinct shapes of yield curves that come up rather frequently and they are -
- Upward slope (Standard Curve - long term maturities gain higher yield)
- Downward slope (Inverted Curve - short term profits are higher than long term ones)
- Flat (Long and short term maturities gain almost similar yield)
Use of the Term in Sentences
- Government debts having different maturities and the interest rates are directly proportional and that is exactly what the yield curve represents.