Yield Curve



Yield Curve

A bond yield curve is a graphical representation of bond yields across the maturity spectrum with yields up the vertical axis and maturity points along the horizontal axis. A normal yield curve will be upward sloping i.e. yields rise the further out the maturity curve one goes. This is because the reasonable expectation is that investors locking up their money for longer until they are repaid should attract a higher return. There are technical reasons why yield curves are sometimes inverted i.e. yields can be reversed at certain maturity points where shorter-term debt yields less than longer-term debt but this tends to be a short-lived phenomenon. A yield curve can be plotted to show the bond yields of a single corporate issuer, a government, or the blended yield of a group of like rated corporate issuers. Or they can be constructed showing two or more lines if the idea is to display yield differentials across different rated classes or between individual issuers. Curves that show minimal differences across maturities are called flat curves; curves with more material differences are steep.


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