Type of Yield Curves

Yield curves are the graphically plotted yield results of interest rates for financial bonds with different maturity dates. These yield curves are used by financial professionals, businesses and bond brokers to help predict interest rate and economic changes.

Types

The primary types of yield curves are a normal curve, an inverted curve and a flat curve. These curve names indicate the visible shape of the yield curve.

Identification

Identification of each type of yield curve usually is evident after plotting the results of interest rates on bonds with different maturity dates on a graph.

Effects

A normal yield curve will result in a gradually curving. concave shape that is lower at the X,Y intercept on a graph. An inverted curve shape is the opposite of the normal yield curve, and the flat yield curve is a straight horizontal line.

Significance

A normal yield curve indicates bonds with short-term yields have a lower yield than bonds with a longer-term maturity, and the inverted yield curve indicates the reverse. A flat yield curve shows there is little difference in bond yields based on maturity.

Function

Yield curves can indicate potential movement in interest rates and can help signal changes in the overall condition of an economy.

References

• Yield Curve
• The Living Yield Curve
• Advanced Bond Concepts

Photo Credit

Image by Flickr.com, courtesy of Balazs Gal