yield curve

Examples of yield curve in the following topics:

• Using the Yield Curve to Estimate Interest Rates in the Future

  • Yield curves on bonds and government provided securities are correlative, and are useful in projected future rates.
  • This is referred to as a yield curve.
  • Inverted yield curves are typically predictors of recession, while positively sloped yield curves indicate inflationary growth.
  • When it comes to interest rates specifically, yield curves are useful constructs in projecting future behavior.
  • This yield curve from 2005 demonstrates the projected yield over time of USD.

• The Yield Curve

  • In finance the yield curve is a curve showing several yields or interest rates across different contract lengths (two month, two year, 20 year, etc...) for a similar debt contract.
  • Based on the shape of the yield curve, we have normal yield curves, steep yield curves, flat or humped yield curves, and inverted yield curves .
  • The yield curve is normal meaning that yields rise as maturity lengthens (i.e., the slope of the yield curve is positive).
  • A flat yield curve is observed when all maturities have similar yields, whereas a humped curve results when short-term and long-term yields are equal and medium-term yields are higher than those of the short-term and long-term.
  • An inverted yield curve occurs when long-term yields fall below short-term yields.

• Term Structure of Interest Rates

  • Yield curve for years 2000 and 2006 predicted the recessions in 2001 and 2007.
  • Yield curve could display a positive, negative, or flat slope and has two characteristics.
  • Economists use the yield curve to predict economic activity.
  • Although many economists and analyst use the yield curve to forecast recessions, the yield curve is not a perfect predictor.
  • The Yield Curve for U.S. government securities for three specific dates

• Chapter Questions

  • Explain both the term structure of interest rates and the yield curve.
  • Which three theories explain the characteristics of the yield curve?
  • If you saw a yield curve with a negative slope, which economic phenomenon would you predict to occur in a year?

• The Term Structure

  • Term structure of interest rates is often referred to as the yield curve.
  • In finance, the yield curve is a curve showing several yields or interest rates across different contract lengths (2 month, 2 year, 20 year, etc...) for a similar debt contract.
  • Because of the term premium, long-term bond yields tend to be higher than short-term yields, and the yield curve slopes upward.
  • This theory explains the predominance of the normal yield curve shape.
  • The US dollar yield curve as of February 9, 2005.

• Calculating Yield to Maturity Using the Bond Price

  • The yield to maturity is the discount rate that returns the bond's market price: YTM = [(Face value/Bond price)1/Time period]-1.
  • The yield to maturity is the discount rate which returns the market price of the bond.
  • Formula for yield to maturity: Yield to maturity(YTM) = [(Face value/Bond price)1/Time period]-1
  • As can be seen from the formula, the yield to maturity and bond price are inversely correlated.
  • Even though the yield-to-maturity for the remaining life of the bond is just 7%, and the yield-to-maturity bargained for when the bond was purchased was only 10%, the return earned over the first 10 years is 16.25%.

• Market Supply

  • As a result, the supply curve is upward sloping .
  • Market supply is the summation of the individual supply curves within a specific market.
  • The supply curve can be derived by compiling the price-to-quantity relationship of a seller.
  • The market supply curve is simply the sum of every seller's individual supply curve.
  • The market supply curve is an upward sloping curve depicting the positive relationship between price and quantity supplied.

• Long Run Supply Decisions

  • The long-run supply curve in a perfectly competitive market has three parts; a downward sloping curve, a flat portion, and an upwards sloping curve.
  • This period of supply is known as "increasing returns to scale," because a proportional increase in resources yields a greater proportional increase in output.
  • Between these two periods is the "constant returns to scale," where a proportion increase in resources yields an equal proportional increase in the amount of output.
  • As more firms enter the market and time passes, production yields less and less returns in comparison to the production.
  • Eventually, production of goods in a market yields less of a return than the amount of goods that go into product, which causes the market to enter into a period of decreasing returns to scale and the market's supply curve slopes upward.

• Banked and Unbacked Highway Curves

  • In an "ideally banked curve," the angle $\theta$ is chosen such that one can negotiate the curve at a certain speed without the aid of friction.
  • As an example of a uniform circular motion and its application, let us now consider banked curves, where the slope of the road helps you negotiate the curve.
  • The greater the angle $\theta$, the faster you can take the curve.
  • In an "ideally banked curve," the angle $\theta$ is such that you can negotiate the curve at a certain speed without the aid of friction between the tires and the road.
  • Friction helps, because it allows you to take the curve at greater or lower speed than if the curve is frictionless.

• Basics of Graphing Exponential Functions

  • That is, the curve approaches infinity as $x$ approaches infinity.
  • The curve approaches infinity zero as approaches infinity.
  • As $1$ to any power yields $1$, the function is equivalent to $y=1$ which is a horizontal line, not an exponential equation.
  • The point $(1,b)$ is always on the graph of an exponential function of the form $y=b^x$ because any positive number $b$ raised to the first power yields $1$.
  • The function $y=b^x$ takes on only positive values because any positive number $b$ will yield only positive values when raised to any power.