YIELD CURVE ANALYSIS

DEFINATION & INTRODUCTION:

A “yield curve” is a line that plots the interest rates, at a set point in
time, of bonds having equal credit quality, but differing maturity
dates.
TYPES OF YIELD CURVES:
Flat Yield Curve

Inverted Yield Curve

Normal Yield Curve
Realized Yield curve
Treasury yield curve

Libor Yield Curve

1.Flat Yield Curve:
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.
2.Inverted Yield Curve:
An interest rate environment in which long-term debt instruments have a lower yield
han short-term debt instruments of the same credit quality. This type of yield curve is
he rarest of the three main curve types and is considered to be a predictor of
conomic recession.
 3.Normal Yield Curve:
A yield curve in which short-term debt instruments have a lower yield than long-term
ebt instruments of the same credit quality. This gives the yield curve an upward
lope. This is the most often seen yield curve shape. Sometimes referred to as
positive yield curve".
4.Realized Yield curve:
The actual amount of return earned on a security investment over a period of time.
This period of time is typically the holding period which may differ from the expected
yield at maturity. The realized yield also includes the returns that have been earned
from reinvested interest, dividends and other cash distributions.
 5.Treasury yield curve:
A graphical representation of the relationship between the different
maturities of Treasury securities and their yield to maturity
6.Libor Yield Curve:
The LIBOR yield curve plots interest rates for a range of maturities (from overnight to
one year). LIBOR yield curve is typically a little higher than government curves and is
widely used in the financial markets.
OTHER CONSTITUENTS:

Curve Steepener Trade

Yield Elbow
Yield Curve Risk
The Term Structure of Interest Rates and
the Yield Curve
 1.Curve Steepener Trade:
A strategy that uses derivatives to benefit from escalating yield
differences that occur as a result of increases in the yield curve between
wo Treasury bonds of different maturities. This strategy can be effective
n certain macroeconomic scenarios in which the price of the longer
erm Treasury is driven down.
2.Yield Elbow :
The point on the yield curve indicating the year in which the
economy's highest interest rates occur.
 3.Yield Curve Risk:
The risk of experiencing an adverse shift in market interest rates
associated with investing in a fixed income instrument. The risk is
associated with either a flattening or steepening of the yield curve,
which is a result of changing yields among comparable bonds
with different maturities
4.The Term Structure of Interest Rates
and the Yield Curve
The term structure of interest rates refers to the graph of STRIP yields versus the
maturity of the STRIPS; sometimes this also referred to as the spot yield curve and
STRIPS rates are referred to as spot rates.
What does yield curve predict?
Yield curve predictions about future growth come in two general
flavors. One tries to predict the rate of growth that can be expected at
some point in the future, the other tries to predict the probability of a
recession occurring. It predicts about the economic indicators like GDP
growth, recession and inflation.
1.Predictions on GDP:
2.Predictions on recession:
3.Predictions on inflation:
Aadhish Pathare- 216

Gavin Lobo- 213

Sanat Verma- 226

Ketan Makwana- 228