This lesson explains how the term structure of interest rates is represented by a yield curve and how to interpret its axes and basic upward-sloping shape. Understanding these ideas helps investors compare yields across maturities and distinguish government bond yields from corporate bond yields.
The term structure of interest rates is the relationship between bond yields and the bonds’ different remaining times to maturity. It describes the yields investors expect or observe for borrowing and lending over different periods.
All flashcards
What is a yield curve?
A graph showing bond yields against the bonds’ respective times to maturity.
How do level and slope differ on a yield curve?
Level refers to the yields shown; slope compares yields across short- and long-term maturities.
Why might a normal yield curve slope upward?
Longer maturities can involve greater uncertainty and interest rate risk, for which investors may require higher yields.
What does an inverted yield curve show?
Short-term yields are higher than long-term yields.
What does a yield curve indicate about the economy?
It can reflect market expectations about rates and economic conditions, but it does not determine future outcomes.
Quiz questions
What relationship defines a normal, or positive, yield curve?Answer: Longer-term yields are higher than shorter-term yields.
An inverted yield curve has historically been associated with which market expectation?Answer: Weaker economic activity and possible future interest-rate cuts.
What characterizes a flat yield curve?Answer: Short- and long-term yields are similar, with little difference between them.
What may a steep, upward-sloping yield curve suggest about expectations?Answer: Investors may expect relatively high future inflation and interest rates.
Why do analysts monitor yield curve movements?Answer: They can reflect market expectations about interest rates and economic conditions.
Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.