Question

Question:
Explain what is meant by the yield curve and briefly outline three theories to explain unequal yields at different maturities and how it is most often sloped. Then briefly
explain why Australia’s yield curve “inverted” during the boom years of 2006-2007.

Answer 1

Ans ) Yield curve is a graph that plots the yields of bonds with same credit quality and different maturities.There are three types of yield curves , the upward sloping curve, the downward sloping curve and the flat curve.Yield curve serve as a standard future interest rate for other debts in the market and an indicator of the economic growth.The normal yield curve which is upward sloping curve dipicts that the interest rate on long -term bond continues to rise at the time of expansion of economy.The downward sloping yield curve or the inverted yield curve is meant to indicate that the yield on the longer term bond will continue to decline during the period of recession.Flat yield curve arises when the economy is in transition from expansion to slowdown as the yield on long term bond decreases and yield on short term securities rises and similarly flat yield curve arises when the economy is in transition from recession to expansion here the long term bond yield started ro increase as comparison to the short term securities.Australian yield curved inverted six times from the year 2006 to 2019.That is not the case of recession and on the basis of that the Central bank of Australia cut the interest rate as a measure to avoid inflation and low growth rate.The reason for this is the slow economic growth and not easing of monetary policies alongwith the main forces which affect the global markets.