Question

comment on the yield curve (shape, theories,etc) and discuss its importance of making financial decisions

Answer 1

The yield curve is a specialized financial tool that is used to track the interest holding period rates % in comparison to various lengths of the maturity profiles.

Yield curves are generally plotted for T-bills and other govt debt securities and used to identify the required time to maturity and the Rate% to be offered for the desired time frame .

On plotting a line between these two profiles a smooth curve is obtained . This curve rises in steep at the beginning , then flattens and then again rises in the later part of the maturity profiles

Types of yield curves .

No	Type	Description
1	Normal yield curve	These yield curves are generally upward sloping yield curves . The points in the curves denote that as and when the time to maturity increase , the demand for the investors to get higher return also increases
2	Flattened yield curve	The yield curve appears to be flattened over the span of years . Thus the issuer of the security isn’t willing to offer higher returns with increasing time frames Thus it denotes that the economy is unstable or in a phase transition is undergoing
3	Inverted yield curve	This is a rather critical phase in the economy when the yield curve becomes flattened . This curve shows that the rates% decline as the maturity profile increases . This denotes that economy is declining and the rates are low as the holding period of the bond increases

Yield curves provides the investors wit ha long term and holistic view in the economy . As such on allaying the yield curves the investor may decide on the timeline of investment and proportion of investment in fixed income based on the nature of the economy

A plotted yield curve for the US Govt. bonds has been shown -

Thanks