Question

WORD COUNT 200

1-Explain what is a yield curve , and how it might be used by a management accountant working with treasury professionals with Example .

Answer 1

An yield curve is a relation between different yileds and price of bonds. There is inverse relation between the price and yield of a bond. A yield curve depicts the sensitivity of different maturity bonds. For example, a short term bond carries lower yield as less risk is less rewarded. A long maturity bond is more sensitive to price change and hence carries more risk. As a result, the reward is also more in the form of higher yield.

A management accountant working treasury professional will analyse the treasury yield cureve to interpret the current and future state of the economy. The treasury yield curve for different maturity bonds are considered as benchmark in the market because of its risk-free nature due to full backing by the government. The treasury yields are compared with investment grade bonds or corporate bonds and the difference in rates is used to determine the spread. This helps in investment decison making.The spread is more during recession and less during normal times.