Yield Curve Analysis
Rahul Chhabra
MBA, 3rd Sem
Page 1
What Does Yield Curve Mean?
• A line that plots the interest rates, at a set
point in time, of bonds having equal credit
quality, but differing maturity dates
Page 2
Yield Curve …meaning
A yield curve is a graphical depiction of
the relationship between the yield on a
class of Securities for different maturities.
Page 3
Yield Curve …meaning
• The yield curve or the term structure of
interest rates is the relationship between the
cost of borrowing money and the amount of
time the money is being borrowed for.
• Yield curves are used by fixed income analysts,
who analyse bonds and related securities, to
understand conditions in financial markets and
to seek trading opportunities. Economists use
the curves to understand economic conditions.
Page 4
Purposes of Using Yield
Curves
There are several reasons as to why the
yield curves are used:
• For comprehending the present situations
of the financial markets
• For comprehending the economic
situations
• For finding out chances to buy and sell
Page 5
Shapes of Yield Curve
• Normal Yield Curve
• Flat or Humped Yield Curve
• Steep Yield Curve
• Inverted Yield Curve
Page 6
What Does Normal Yield Curve Mean?
• A yield curve in which short-term
debt instruments have a lower yield than
long-term debt instruments of the same
credit quality.
• This gives the yield curve an upward slope.
This is the most often seen yield curve
shape.
• Sometimes referred to as "positive yield
curve".
Page 7
Normal Yield Curve
Page 8
What Does Flat Yield
Curve Mean?
• A yield curve in which there is little
difference between short-term and long-
term rates for bonds of the same credit
quality.
• This type of yield curve is often seen
during transitions between normal and
inverted curves.
Page 9
Flt Yield curve
Page 10
What Does Inverted Yield
Curve Mean?
• An interest rate environment in which long-
term debt instruments have a lower yield
than short-term debt instruments of the
same credit quality.
• This type of yield curve is the rarest of the
three main curve types and is considered
to be a predictor of economic recession.
Page 11
Inverted Yield Curve
Page 12
What Does Humped Yield Curve Mean?
• A relatively rare type of yield curve that
results when the interest rates on medium-
term fixed income securities are higher
than the rates of both long and short-term
instruments.
• Humped yield curves are also known as
bell-shaped curves.
Page 13
Humped Yield Curve
Page 14
Why the shape matters?
• In general, when the yield curve is positive, this indicates
that investors require a higher rate of return for taking the
added risk of lending money for a longer period of time.
• Many economists also believe that a steep positive curve
indicates that investors expect strong future economic
growth and higher future inflation (and thus higher interest
rates).
• A sharply inverted yield curve means investors expect
sluggish economic growth and lower inflation (and thus
lower interest rates).
• A flat curve generally indicates that investors are unsure
about future economic growth and inflation.
Page 15
Theories Explaining Shapes of Yield Curves:
There are several theories that are
associated with yield curve. These theories
try to describe the way the yields tend to
keep changing following their maturity. Those
theories are:
• Liquidity Preference Theory
• Market Segmentation Theory
• Market Expectations Hypothesis (Pure
Expectations)
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• Liquidity Preference Theory:
Investors prefer liquidity — upward sloping yield curve
• Pure Expections Theory
Term structure reflects market’s current expectation of future rates
• Market Segmentation Theory:
Shape is determined by supply of and demand for securities
within each maturity sector
• Shape of the yield curve is best explained by a combination of the
three aforementioned theories.
Page 17
External Factors Affecting yield Curve
• Central Bank Policy
• Inflation Concerns
• Liquidity Desires
• Supply/Demand Conditions
Page 18
INTEREST RATE
• The basic commodity that the financial
institutions deal and trade among themselves
and with others is money, and the price of
money is the interest rate.
• Interest rates affect the value of money and
capital market instruments, both domestically
and internationally.
• Changes in interest rates have certain
predictable effects on the price of fixed income
securities, or bonds.
Page 19
WHAT DETERMINES INTEREST RATES?
• The 3 theories of Yield curve are what
affects and determines the Interest rate.
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Thank You
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