Question

Explain how a yield curve is constructed and what its shape reveals about interest rates.

Answer 1

The curve is The line that plots interest rates of the bonds having equal credit quality with different maturity rates.

The slope of the yield curve Shows an expected idea of future interest rate.

There are three main types of yield curve shapes:

normal (upward sloping curve),

inverted (downward sloping curve) and

flat.

The yield curve is used as a benchmark for the debt rates in the market, such as mortgage rates or bank lending rates, and it is used to predict changes in economic output and growth.