Question

Given the following three yield curves, explain the type of market each represents. With respect to the center yield-curve what does that shape indicate with respect to short-, medium- and long-term risk of the economy. Which yield curve is the ‘normal’ and which is the ‘inverted’?

(One of the graphs is upward sloping exponentially, the middle graph is a parabola, and the last graph is downward sloping exponentially.)

Answer 1

Upward sloping yield curve will be reflecting that when there will be a stability in the economy and economy is expected to go up, the short-term interest rate and the long-term interest rate will be going up and it will be reflected through upward-sloping yield curve which will be also a situation of normal economy.

Flat yield curve will be reflecting that short term interest rate and long term interest rate are almost similar in nature and they are not growing so they are like having an indication that economy is not going to grow in the long run and it is going to remain at these levels so they are offering with similar rate of interest with both short-term and long-term interest rates

Downward sloping yield curve or inverted yield curve is a situation in which the long term interest rate is below the short term interest rate and it is falling so there will be a risk related to to impending recession because downward yield curve are always reflective of impending recession in the economy.

inverted yield curve is the downward sloping yield curve and normal curve will be the upward sloping yield curve.