Yield Curves

Question 1

Yield Curves

Answer 1

The yield curve for a particular bond market is the result of plotting the yields offered on varying bonds against the maturities of those bonds.

Question 2

Normal Yield Curve

Answer 2

Based on the assumption that longer dated bonds are more risky than near dated bonds. For this reason investors will require a higher rate of interest for a longer loan. If the market believes that short-term rates are due to rise, one would expect the curve
to assume an upward slope.

Question 3

Flat Yield Curve

Answer 3

Where there is no perceived investment risk the yield curve can be flat, this occurs in a (stable economic situation) where no significant changes are expected to interest rates or inflation.

Question 4

Inverted Yield Curve

Answer 4

Where investor optimism on inflation, a falling ‘reverse’ or
inverted yield curve is where shorter-term bonds have a higher yield than longer-term bonds, and is seen as an indicator of recession, with investors effectively demanding a higher return
for the perceived higher risk of a short-term bond compared to that of a longer-term bond.

Question 5

Liquidity Preference

Answer 5

Investors requiring a premium yield for long term investment of capital.