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Unraveling yield curve

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Transcript

  • 1. Unraveling the ‘Yield Curve’ - by Prof. Simply Simple
  • 2.
    • In finance, the yield curve is the relation between the interest rate (or cost of borrowing) and the time to maturity of the debt for a given borrower in a given currency.
    • For example, the current U.S. dollar interest rates paid on U.S. Treasury securities for various maturities are closely watched by many traders, and are commonly plotted on a graph informally called the ‘yield curve’ which is depicted in the previous slide.
  • 3. So what is ‘yield’?
    • The yield of a debt instrument is the annualized percentage increase in the value of the investment.
    • For instance, a bank account that pays an interest rate of 4% per year has a 4% yield.
  • 4. In general…
    • The percentage per year that can be earned is dependent on the length of time that the money is invested.
    • This earning for having invested your money in a particular investment instrument is called as ‘yield’.
    • Also, it is important to understand that the yield is not directly proportional to the length of the investment. ( It is not a straight line relationship)
  • 5. So what are the uses of the Yield Curve?
    • Yield curves are used by fixed income analysts, who analyze bonds and related securities, to understand conditions in financial markets and to seek trading opportunities.
    • Economists use the curves to understand economic conditions.
    • The yield curve function Y is actually only known with certainty for a few specific maturity dates. The other maturities are calculated by interpolation.
  • 6. The typical shape of a Yield Curve
  • 7. Now…
    • Yield curves are usually upward sloping i.e. the longer the maturity, the higher the yield, with diminishing marginal growth (which means that after a point every increase in duration will bring lesser incremental return).
  • 8. This is because…
    • It is easier to predict the near term as against the long term.
    • Hence, short term papers are usually held by the investor till its maturity.
    • And long term instruments are usually traded in the market as their returns get affected by changes in interest rates, which occur regularly in an economy.
  • 9. Also…
    • The yield curve can also be flat or even concave in shape where the short term yield is seen to be more than than the long term yield.
    • This is being witnessed currently wherein overnight interest rates (call money rates) soared due to the liquidity crunch.
    • Yield curves move on a daily basis, reflecting the market's reaction to news.
  • 10.
    • Hope you have now understood the concept of
    • Yield Curve
    In case of any query, please e-mail [email_address]