Question

Describe the characteristics of long-term debt. What is the current bond yield in the market? What is an inverted bond yield curve? What does it reflect about the economy's status?

Answer 1

Answer: Characteristics of long term debt

Long term debt has a number of characteristics that make it distinct from short term debt financing. Some of these traits are advantageous for you as a borrower , while others pose potential challenges. Taking on too much long term debt is risky, but it does offer advantages over paying cash for major purchases. Mortgages, equity loans, car loans, major appliances financing, student loans and personal loans are among common long term consumer loans.

Current yield

Current yield is an investment's annual income divided by current price of the security. This measure examines the current price of a bond, rather than looking its face value. current yield represents the return an investor would expect to earn, if the owner purchased the bond and held it for a year.

Inverted yield curve

An inverted yield curve represents a situation in which long term debt investments have lower yields than short term debt investments of the same credit quality. An inverted yield curve is sometimes referred to as a negative yield curve.

The shape of yield curve changes with the state of economy. The normal or upward sloping yield curve occurs when the economy is growing. Two primary economic theories explain the shape of yield curve; the pure expectations theory and the liquidity preference theory.