CHANGING YIELD CURVE AND

ITS INDICANTS

By: Hitendrasinh Zala

WHAT IS YIELD
Yield refers to the annual return on an investment

A graph that depicts the relationship between bond

yields and maturities

An important tool in fixed-interest investing

WHAT IS YEILD CURVE
The yield curve is a line graph that plots the
relationship between yields to maturity and time to
maturity for bonds of the same asset class and credit
quality
 The graph below is the yield curve for U.S. Treasuries on December 31, 2009. It shows that the yield
at that time for the two-year Treasury bond was about 1.8 per cent while the yield on the 10-year asury

bond was about 4.3 per cent .

TYPES OF YIELD CURVE
Normal yield curve
Steep yield curve
Flat or humped yield curve
Inverted yield curve
Normal Yield Curve
Steep Yield Curve
Flat Yield Curve
Inverted Yield Curve
Upward Slop
it may be that the market is anticipating a rise in
the risk-free rate. If investors hold off investing now,
they may receive a better rate in the future.
the higher interest rate on long-term investments.
Downward Slop
The forward rate will embody a premium compare
with the expected future short interest rate. This
liquidity premium compensates short term investors
for the uncertainty about the price at which they will
be able to sell their long term bond at the end of the
year
Uncertainty about exceeding expected return after 1
year maturity
WHAT DETERMINES THE SHAPE OF YEILD
CURE
Three widely followed theories have evolved that attempt to explain these factors in detail:

The Pure Expectations Theory holds that the slope of the yield curve reflects only investors'
expectations for future short-term interest rates.

The Liquidity Preference Theory, an offshoot of the Pure Expectations Theory, asserts that
long-term interest rates not only reflect investors' assumptions about future interest rates
but also include a premium for holding long-term bonds, called the term premium or the
liquidity premium

The Preferred Habitat Theory, another variation on the Pure Expectations Theory, states that
in addition to interest rate expectations, investors have distinct investment horizons and
require a meaningful premium to buy bonds with maturities outside their "preferred"
maturity, or habitat. Proponents of this theory believe that short-term investors are more
prevalent in the fixed-interest market and therefore, longer-term rates tend to be higher than
short-term rates.
Indications
The yield curve is a measure of the market's
expectations of future interest rates given the current
market conditions.
Benchmark fixed income securities
The curve is used to predict changes in economic
output and growth.
Thank You