Question

1A-) Using the graph, explain what is meant by the Yield Curve and the forms it takes?

2A-) By checking at it, do you think that this curve can be used as a future indicator for the performance of the economy?

Answer 1

1A. Return curves show the same credit bond with different maturities at the interest rates.

The three main types of output curves are regular, inverted and flat. Upward sloping (also called normal rate curves) means that long-term bonds are more effective than short-term bonds.

Whilst standard curves indicate economic growth, downhill curves indicate economic recession. The lines are downhill.

Every business day, rates for yield curves are reported on the website of the Treasury.

Form:

Nominal: A normal or up-sloped yield curve indicates yields on longer-term bonds may continue to rise, responding to periods of economic expansion. When investors expect longer-maturity bond yields to become even higher in the future, many would temporarily park their funds in shorter-term securities in hopes of purchasing longer-term bonds later for higher yields. In a rising interest rate environment, it is risky to have investments tied up in longer-term bonds when their value has yet to decline as a result of higher yields over time. The increasing temporary demand for shorter-term securities pushes their yields even lower, setting in motion a steeper up-sloped normal yield curve.

Inverted: An inverted or downward curve of return indicates a sustained decline in yields on long-term debt, leading to economic recession times. Investors assume that longer maturity bond returns in future will be smaller, many will purchase longer maturity bonds to lock up returns before they further decrease. The increasing demand for long-term bonds and short-term bond demand lead to higher prices but lower yields on long-term bonds, lower prices and higher returns on short-term bonds, which reverse a slope yield curve.

Flat: Depending on the changing economic conditions, a flat yield curve may emerge from the standard or inverted yield curve. When economic growth shifts from acceleration to slower development and even recession, long-term bond returns continue to decline and shorter-term debt returns are likely to increase, turning the usual rate curve into a curve of flat returns. As the economy moves from recession to recovery and future growth, long-term bond returns will increase and short-term securities 'returns will likely decrease, pushing an inverted rate of return curve into a flat return curve.

2A. Yes!

For two key reasons the yield curve is significant. It provides us with first and foremost insight into the economic condition in which all investors see. When you believe in the power of free markets, then all market participants 'collective judgment is the greatest evidence of what actually happens.

The longer a treasury period, the greater the return. Investors are seeking higher profits for a longer time to keep their capital locked up. The more positive exchange is about the economy, the higher is the return on a 10-year or 30-year bond.

Please don't forget to like the solution if it is helpful. Thank you.