Yield Curves

Shapes of yield curves

Normal yield curve

Long term rates above short term rates

Upward (positive) slope

Inverted yield curve

Short term rates above long term rates

Downward (negative) slope

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 Yield Curves

Normal Inverted
Yields Yields

Maturities Maturities

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 Yield Curves

Flat yield curve

Long term and short term rates the same

No slope

Humped yield curve

Intermediate tem rates exceed long and short rates

Inverted saucer shaped

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 Yield Curves

Flat Humped
Yields Yields

Maturities Maturities

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 Yield Curves

Yield Curves Theory and Practice

Interest rate levels and shape of the yield curve

Nominal interest rates (yields to maturity)

Real interest rates

Expected inflation

Other factors

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 Yield Curves

Theories explaining the shape of yield curve

Liquidity (preference) theory – higher expected risks require higher
yields/expected returns

Market segment(ation) theory – the nature of an issuers/investors

likely to issue/investment in a particular maturity range

Expectations theory – today’s interest rates reflect market participants’

expectations of future interest rate movements

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