# Yield Curve

In finance, the yield curve is a curve showing several yields or interest rates across different contract lengths (2 month, 2 year, 20 year, etc...) for a similar debt contract. The curve shows the relation between the (level of) interest rate (or cost of borrowing) and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. For example, the 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 such as the one on the right which is informally called "the yield curve." More formal mathematical descriptions of this relation are often called the term structure of interest rates.

The shape of the yield curve indicates the cumulative priorities of all lenders relative to a particular borrower (such as the US Treasury or the Treasury of Japan). Usually, lenders are concerned about a potential default (or rising rates of inflation), so they offer long-term loans for higher interest rates than they offer for shorter-term loans. Very rarely, when lenders are seeking long-term debt contracts more aggressively than short-term debt contracts, the yield curve "inverts," with interest rates (yields) being lower and lower for each longer periods of repayment so that lenders can attract long-term borrowing.

The yield of a debt instrument is the overall rate of return available on the investment. In general the percentage per year that can be earned is dependent on the length of time that the money is invested. For example, a bank may offer a "savings rate" higher than the normal checking account rate if the customer is prepared to leave money untouched for five years. Investing for a period of time t gives a yield Y(t).

This function Y is called the yield curve, and it is often, but not always, an increasing function of t. 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, while the other maturities are calculated by interpolation (see Construction of the full yield curve from market data below).

### Other articles related to "yield curve, yield, curve, yields":

Yield Curve - Relationship To The Business Cycle
... The slope of the yield curve is one of the most powerful predictors of future economic growth, inflation, and recessions ... One measure of the yield curve slope (i.e ... An inverted yield curve is often a harbinger of recession ...
... A factor-based model of yield curve movements is calculated by deriving the covariance matrix of yield shifts at predefined maturities, and calculating the eigenvectors and eigenvalues of this matrix ... Each eigenvector corresponds to a fundamental model of the yield curve, and each eigenvector is orthogonal, so that the curve movement on any given day is a linear combination of the basis eigenvectors ... matrix then give the relative weights, or importance, of these curve shifts ...
Bootstrapping (finance)
... bootstrapping is a method for constructing a (zero-coupon) fixed-income yield curve from the prices of a set of coupon-bearing products, e.g ... structure of spot returns is recovered from the bond yields by solving for them recursively, by forward substitution ... Given that, in general, we lack data points in a yield curve (there are only a fixed number of products in the market) and more importantly these have varying coupon frequencies, it makes sense to ...
... For managers who need to account for changes in the shape of the yield curve in detail, a single risk measure for interest-rate sensitivity is insufficient and a ... Ho defines a number of maturities on the yield curve as being the key rate durations, with typical values of 3 months, 1, 2, 3, 5, 7, 10, 15, 20, 25 and 30 years ... other words, a key rate duration measures the effect of a change in the yield curve that is localized at a particular maturity, and restricted to the immediate vicinity of that ...
Immunization (finance) - Immunization in Practice
... by creating long and short positions along the yield curve ... Government Treasury yield curve reveals that more than 90% of the yield curve shifts are parallel shifts, followed by a smaller percentage of slope shifts and a very small percentage of curvature shifts ... durations at the long and short end of the curve, and a matching short position with a duration in the middle of the curve ...

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