Question

List the reasons why the yield on a debt security will vary and explain why these reasons impact the yield.

Answer 1

Yield on a debt securities will be varying because of following reasons-

A. Changes in interest rate will be one of the major reason because of which yields on debt securities will be changing because when there would be higher interest rate, then the yields on the debt securities will be readjusting themselves with the price in order to get in accordance with interest rates.

B. Changes in the inflation in the economy is another major reason because of which the yields on debt securities will be fluctuating as inflation will be reflective of the demand pattern scenario in the economy.

C. Changes in the monetary policies are another major factor for fluctuation of yield on debt securities because they will be redefining the economic policy structure of Central banks and these debt securities will be readjusting in accordance with them

D. Growth estimates of an economy by the central bank will be another major factor due to which yields on these debt securities will be readjusting in accordance with their price.

E . Expectations of an impending recession can lead to an inverted yield curve as it can be seen in previous empirical evidence so yield on debt securities will be readjusting in an expectation of impending recession.

F. Yield on the debt securities will also be fluctuating due to to corporate issues, if it is a corporate debt and if the corporate repayments are highly unlikely.