There are three types of yield curves:
1. Normal yield curve _ The interest rates of those bonds with longer maturities are higher than those of short-term bonds, because the risks of holding bonds for a long time, such as inflation, require higher returns. Bond investors signal that they expect economic growth to continue without major interruption, so they are willing to invest money for a long time.
2. Reverse yield curve _ Short-term bonds have higher yields because investors are worried about the near future, so they need higher returns to hold these short-term investments. Lower interest rates often mean weaker economic growth, and the reverse yield curve may indicate that the economic recession is coming.
3. Stable yield curve _ Short-term and long-term yields are at similar levels, indicating that the economy is in a transition period, whether from economic growth to recession or from economic recession to growth. The former's short-term rate of return rises and the long-term rate of return falls, while the latter is the opposite.
The function of yield curve-yield curve is a basic tool to analyze the trend of interest rate and make market pricing, and it is also an important basis for investment. When the national debt is freely traded in the market, different maturities and corresponding different yields form the "benchmark interest rate curve" of the bond market. Therefore, the market has a reasonable pricing basis, and other bonds and various financial assets are based on this curve, and the appropriate price is determined after considering the risk premium.
The yield curve is a graph showing the yield of a group of bonds or other financial instruments with the same currency and credit risk but different maturity dates. The vertical axis represents the rate of return, and the horizontal axis is the time from maturity.
Rate of return refers to the investment rate of a single project, and interest rate is the total level of all investment returns. In most cases, the rate of return is equal to the interest rate, but there is often a deviation between the rate of return and the interest rate, which leads to the inflow or outflow of funds in a certain field or at a certain time, thus bringing the rate of return closer to the interest rate. During the period, the trend of bond yields may be inconsistent, and three yield curves may be formed: upward, horizontal and downward.