The yield curve is a graphical representation of the relationship between fixed-income securities yields and the time it takes to reach maturity. Yield is the interest rate on fixed-income securities which can include various financial instruments such as government bonds or futures contracts. Usually investors want to make sure that the yield retains profitability until maturity.
How is the Yield Curve Plotted?
The yield curve is represented on a chart with one vertical and one horizontal axis. The y-axis represents the yield and is the horizontal axis of the graph. The vertical axis is the x-axis which represents time to maturity for a specific fixed-interest security.
Why is the Yield Curve Important?
Investors watch the yield curve closely in order to attempt to forecast future interest rate movements. For example an investor may be satisfied earning a 5% return when the basic rate of lending is 2%. However, when the lending rates increase to 6% there tend to be other options that may be able to generate more investment income. By examining the shape of the yield curve investors can see potential future trajectories of basic lending rates.
It is in an investor’s best interests to learn how to interpret the information presented by the yield curve. This can help to maximize earnings from fixed-income investments. However, it is also best to have a proper risk management plan in place in case something unexpected happens in the markets.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.