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Yield Curve and the 3 Shapes


What is a Yield Curve and the three different types?

The curve relating to the maturity of debt and interest rates is called the yield curve. The yield curve may assume any shape, but it is generally upward sloping. It means that more the maturity greater the interest risk. In the other debt market, yield curve is used as the benchmark to find out the term structure of the interest rates. Mainly it is used to forecast the changes in economic output and growth. 

The three different types of curves are as follows: 

1.      Normal yield curve: This yield curve depicts that yield is mainly depends on the maturity period. It means that longer maturity bonds have higher yield, due to high risk involved in it as compared to the short term bonds or securities. 

2.      Flat yield curve: Flat yield curve explains that both the yields i.e. short duration and long duration are quite similar. It is also termed as the economic conversion predictor. 

3.      Inverted yield curve: An inverted yield curve is results when the short term rates are higher than the long term rates. 

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