Yield Curve Flashcards
What is a yield curve?
Is a graph
Depicts the current interest rates for bonds of various bond maturities
The X-axis represents time to maturity
The Y-axis represents interest rates
Can be constructed for any kind of debt
What is the purpose of a yield curve?
To assess economic expectations and future economic outcome
Therefore it is a tool to assist in forecasting economic phases or cycle but not stock market phases or cycles
Stock market cycles have a history of preceding and lagging economic cycles
What is a normal yield curve?
Represents a healthy economy
Economy is growing
Unemployment remains low
Consumers expect a positive inflation
The higher interest rate return to compensate for higher inflation
What is a flat yield curve?
An indication that an economy is in a transition period from a healthy economy to a recessionary economy
Little difference between s/t and l/t interest rates on bonds of the same quality
Historically, this occurred when the central bank increased a series of s/t interest rates by slowing economic activities
What is an inverted yield curve?
The rarest of the 3
Forecast of an economic slowdown or recession
Short-term bonds have higher rates
This is related to a situation with deflation
