Yield Curve (Finance)

Meaning of Yield Curve in Finance

In finance, yield curve means graphical  presentation of the relationship of maturity period and interest rate of debt. This yield curve is also called treasury yield curve. When Government or bank takes loan from public, it is called treasury debt. Government fixes its cost of debt that is called interest. This interest is fixed according to the maturity time period of treasury debt. Long term treasury debt will receive high rate of interest but low period debt will receive low rate of interest. Because government treasury debt is risk free. So, rate of interest will increase by diminishing marginal in long period.

Yield Curve Graph

Following is yield curve graph

Yield Curve Analysis

Analysis of anything will be helpful us to get result. Following points may write on the basis of analysis of yield curve

a) Typical Upward Sloping Shape

Main reason of this, it is risk free investment of people. Interest rate will increase with slow rate because more people are interested to invest in treasury because all these investor wants to less earning but it should be totally risk free.

b) To Calculate the Value of Bond 

In yield curve analysis, we analyze the rate of interest on the basis of its maturity. It will be helpful to calculate the value of Bond. Let me explain this with a simple example. Suppose A is the Kisan Vikas Pater ( Indian Govt. Bond). Suppose, Mr. has bought Kisan Vikas Pater of Rs. 1000 in previous year 2010 for 10 years. Suppose, 10% rate of interest applies on it and this amount will be doubled. Now, if A wants to sell it in 2015 to B, B will see its yield curve, for 5 years, govt. is getting debt just giving 5% interest. Now, B is ready to pay to A Rs. 1500. Because both A and B will be in profit. A's bond price will increase and B will get more interest than 5%.

c) Comparison of yields of Different Entities

We can compare the yield of govt. bond and private bond on the basis of yield curves of both entities. On this comparison, we check which is providing better return? In private entity, we also analyze their credit rating. If it is good, we can move our investment in private sector also.

d) Analysis of Risk and Return

Yield curve analysis is also helpful for analysis of risk and return of our investment in debt. We want to find that time which is optimum for getting optimum return at minimum risk.

e) To Study Business Cycle

As economist, you can analyze yield curve for studying business cycle. At that time, we classify government taken loan in T-bills, treasury notes and treasury bonds. T-bills are issued for 3 months, treasury notes are issued for 2 to 3 years and treasury bonds are issued for 10 to 20 years. Future economic growth, inflation, and recessions are the main business cycle and these are affected with yield curve. Yield curve position will affect commercial banks. They can tight the funds or more flow of funds at minimum conditions. Result may come to use in the form of credit strength or credit crisis. 






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Accounting Education: Yield Curve (Finance)
Yield Curve (Finance)
Accounting Education
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