Week 4 Discussion

Yield Curve

The structure of interest rates is the term referring to the relationship between interest rates and maturity of securities. In its graphical representation, it is called the yield curve. The term structure refers to the relationship among various maturities of the same type of security. The term yield curve represents the graphical relationship between yield and maturity. Yield is measured on the vertical axis, and term to maturity is measured on the horizontal axis.

Does the yield curve slope upward, downward, or is it horizontal? In reality, the yields on all maturities tend to move together, but there are distinct, divergent patterns in short-term and long-term movements.

The term structure of interest rates, also called the yield curve, is the relationship between interest rates or yields and the time to maturity for debt securities of similar risks. The structure is constructed by graphing the yield to maturities and the respective maturity dates of a set of benchmark �xed-income securities.

The yield curve is a measure of the market's expectations of future interest rates based on current market conditions. Treasuries, which are issued by the federal government, are considered risk free, and their yields are often used as the benchmarks for �xed-income securities with the same maturities.

The term structure of interest rates is graphed as though each coupon payment of a non-callable �xed-income security were a zero-coupon bond that matures on the coupon payment date. The exact shape of the curve can differ at various points in time. When the normal yield curve changes shape, it indicates that investors may need to reconsider their investment decisions.