What is a normal yield curve?
The normal yield curve, also known as a positive yield curve, is a visual tool that shows a direct relationship between interest rate and time to the investment maturity. It is observed when short -term investments provide a lower return rate than long -term investments. In the graph, the normal curve of the proceeds is asymptage up. When the curve reaches its peak, it is generally equal to how the marginal increase decreases. These risks include interest rate fluctuations, lack of profit investment opportunities and the possibility of failure. The time value of money can also change, so the value of today's dollar is more valuable today than the value of the dollar tomorrow. The longer the investor's money is associated with the investment, the greater the chance of meeting the risk and loss of money.
There are three types of yield curves: a normal yield curve, a reversed yield curve and a flat yield curve. The normal yield curve is present when investors have confidence in a growing economy and expect inflation to increase over time. RunEm period of deflation, when prices fall, the yield curve turns. This is because investors believe that the dollar will be more valuable in the future than today. When a flat yield curve is present, it is a sign that the economy slows down.
The most common use of the normal yield curve is a scale for debt, such as stocks, futures, options, commodities, forex and bonds. To create a yield curve, a three -month, two -year, five -year and 30 -year debt in the US is usually used, because the US Ministry's debt in the US is considered a risk -free in failure. Investors compare the income curve of investment with American treasures of a profitable curve to verify that they are fairly compensated for the risk.
The overall shape of the yield curve is determined by current economic conditions and the confidence of investors for the future. The yield curve therefore changes how the state of the economy changes. If a normal yield curve is present, it showsthat investors have confidence in the economy and the future. When the yield curve begins to move to the flat curve of the yield, it could mean that the economy slows down and the recession is approaching.