Yield Curve

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 such as the one following, which is informally called "the yield curve." More formal
mathematical descriptions of this relation are often called the term structure of interest
rates.
US Treasury 3 Month 6 Month 2 Year 5 Year 10 Year 30 Year
April 27, 2009 0.10 0.29 0.96 1.94 2.99 3.88

Diagram # 1

4.5
4
3.5
3
2.5
Series1
2
1.5
1
0.5
0
3 Month 6 Month 2 Year 5 Year 10 Year 30 Year

Explanation:
In the above diagram we have the yield curve of USA as per April
27, 2009. We have different periods (years) on X-axes and interest rates on y-axes,
with the help of above data we potted the diagram of yield curve. The curve have up
ward trend which is showing that the interest rate for the short period is low and
investor is getting high interest rate for long term investments, which is favorable for
economy of any country.
US Treasury 3 Month 6 Month 2 Year 5 Year 10 Year 30 Year
December 29, 0.06 0.22 0.88 1.51 2.13 2.61
2008

Diagram # 2

2.5

1.5 Series1

0.5

0
3 Month 6 Month 2 Year 5 Year 10 Year 30 Year

Explanation:
In the above diagram we have the yield curve of USA as per
December 29, 2008. We have different periods (years) on X-axes and interest rates
on y-axes, with the help of above data we potted the diagram of yield curve. The
curve have up ward trend which is showing that the interest rate for the short period
is low and investor is getting high interest rate for long term investments, which is
favorable for economy of any country.
US Treasury 3 Month 6 Month 2 Year 5 Year 10 Year 30 Year
June 30, 2008 1.65 2.12 2.63 3.35 3.97 4.52

Diagram # 3

5
4.5
4
3.5
3
2.5 Series1
2
1.5
1
0.5
0
3 Month 6 Month 2 Year 5 Year 10 Year 30 Year

Explanation:
In the above diagram we have the yield curve of USA as per June 30,
2008. We have different periods (years) on X-axes and interest rates on y-axes, with
the help of above data we potted the diagram of yield curve. The curve have up ward
trend which is showing that the interest rate for the short period is low and investor
is getting high interest rate for long term investments, we can clearly see that even for
short term investment like 3 months interest rate is more then 1.5% which is quite high as
compare with the above two diagrams but it still have up ward trend which is favorable for
economy of any country.
US Treasury 3 Month 6 Month 2 Year 5 Year 10 Year 30 Year
December 31, 3.14 3.42 3.11 3.50 4.08 4.50
2007

Diagram # 4

5
4.5
4
3.5
3
2.5 Series1
2
1.5
1
0.5
0
3 Month 6 Month 2 Year 5 Year 10 Year 30 Year

Explanation:
In the above diagram we have the yield curve of USA as per
December 31, 2007. We have different periods (years) on X-axes and interest rates
on y-axes, with the help of above data we potted the diagram of yield curve. The
curve have up ward trend which is showing that the interest rate for the short period
is low and investor is getting high interest rate for long term investments, we can
clearly see that even for short term investment like 3 months interest rate is more then 3%
which is quite high as compare with the above three diagrams but it still have up ward trend
but for mid term investment like 2 years came down and then if goes up ward for the long
term investment, which is favorable for economy of any country.
US Treasury 3 Month 6 Month 2 Year 5 Year 10 Year 30 Year
July 2, 2007 4.80 4.93 4.87 4.93 5.03 5.12

Diagram # 5

5.2

5.1

4.9 Series1

4.8

4.7

4.6
3 Month 6 Month 2 Year 5 Year 10 Year 30 Year

Explanation:
In the above diagram we have the yield curve of USA as per July 02,
2007. We have different periods (years) on X-axes and interest rates on y-axes, with
the help of above data we potted the diagram of yield curve. The curve have up ward
trend which is showing that the interest rate for the short period is low and investor
is getting high interest rate for long term investments, we can clearly see that even for
short term investment like 3 months interest rate is 4.5% which is quite high as compare
with the above four diagrams but it still have up ward trend but for mid term investment
like 2 years came down to 4.87 from 4.93 and then if goes up ward for the long term
investment, which is favorable for economy of any country.
US Treasury 3 Month 6 Month 2 Year 5 Year 10 Year 30 Year
January 1, 2007 5.01 5.08 4.81 4.69 4.70 4.81

Diagram # 6

5.2
5.1

5
4.9
4.8 Series1
4.7

4.6
4.5
4.4
3 Month 6 Month 2 Year 5 Year 10 Year 30 Year

Explanation:
In the above diagram we have the yield curve of USA as per July 02,
2007. We have different periods (years) on X-axes and interest rates on y-axes, with
the help of above data we potted the diagram of yield curve. The curve have up ward
trend for very short period of three months, we can clearly see that even for short term
investment like 3 months interest rate is 5.01% which is very high as compare with the
above diagrams, after 6 months curve have down wards trend and at the end for long term
investment the interest rate goes higher but still it is very low as compare to the three or six
months investment, which is unfavorable for economy of any country.
Conclusion:
After analyzing the above data and diagrams we concluded that in the
first three diagrams (which shows the data from June 30, 2008 to April 27, 2009)
curve always have up wards trend which shows that interest rate for long term
investment is getting higher as investment period increases. In diagram # 4 & 5 the
interest rate for short term investment is very high from the start then for the mid
term investment interest rate decreases and then for long term investment it has
increasing trend. In the last diagram initial interest rate is very high then it start
decreasing and at the end for long term investment it increases but still it is not
higher then initial interest rate which is highly unfavorable for any economy. So, we
concluded that first two diagrams are highly favorable for economy and the last
diagram is highly unfavorable for economy.

Reference:
www.yieldcurve.com
www.bloomberg.com
www.Newyorkfed.org