Académique Documents
Professionnel Documents
Culture Documents
Simply Simple
In finance, the yield curve is the relation between the interest rate (or cost of borrowing) and the time to maturity of the debt for a given borrower in a given currency. For example, the current U.S. dollar interest rates paid on U.S. Treasury securities for various maturities are closely watched by many traders, and are commonly plotted on a graph informally called the yield curve which is depicted in the previous slide.
So what is yield?
The yield of a debt instrument is the annualized percentage increase in the value of the investment. For instance, a bank account that pays an interest rate of 4% per year has a 4% yield.
In general
The percentage per year that can be earned is dependent on the length of time that the money is invested. This earning for having invested your money in a particular investment instrument is called as yield.
Also, it is important to understand that the yield is not directly proportional to the length of the investment. ( It is not a straight line relationship)
Now
Yield curves are usually upward sloping i.e. the longer the maturity, the higher the yield, with diminishing marginal growth (which means that after a point every increase in duration will bring lesser incremental return).
This is because
Hence, short term papers are usually held by the investor till its maturity.
And long term instruments are usually traded in the market as their returns get affected by changes in interest rates, which occur regularly in an economy.
Also
The yield curve can also be flat or even concave in shape where the short term yield is seen to be more than than the long term yield. This is being witnessed currently wherein overnight interest rates (call money rates) soared due to the liquidity crunch. Yield curves move on a daily basis, reflecting the market's reaction to news.