Question

Answer each question succinctly yet completely. Be mindful of the multiple parts to each question.

13. What is a normal yield curve? What is an inverted yield curve? What is the yield curve specifically designed to represent? (Hint: Think government, mortgage, AAA, and municipal bonds.) What does the inverted US Treasury Bond yield curve generally suggest about the upcoming economic environment?

Answer 1

Normal yield curve is a yield curve where short term debt instruments have lower yield and long term debt instruments have higher yield of the same credit quality. It is upward sloping curve and generally seen this kind of yield curve in economy.

Inverted yield curve is a yield curve where long term debt insruments have lower yield and short term debt instruments have higher yield for the same credit quality. It is downward sloping curve and it is rarest among different types of yield curve.

Inverted US Treasury Bond yield curve generally suggest that recession is coming. It is an indicator of economic recession.