The document discusses the yield curve, which graphs bond yields against their maturities. A normal yield curve has longer-term bonds yielding more than shorter-term bonds due to longer-term risks. An inverted yield curve occurs when short-term yields are higher than long-term yields, potentially signifying an upcoming recession. A flat or humped yield curve means short and long-term yields are close, predicting an economic transition. The document also summarizes several theories about yield curves, such as the expectations theory where long-term rates forecast future short rates.

1. Yield Curve
Gowtham Kumar V
17P002

2. The Yield Curve
The Yield Curve is made up by graphing the plots of the yields of bonds of
similar quality or risk class against their maturities, ranging from shortest to
longest term. It gives investors a snap-shot to compare the yields offered by
short-term, medium-term, and long-term interest rate securities.

3. Normal yield curve
The shape of the yield curve gives an idea of future
interest rate changes and economic activity.
There are three main types of yield curve shapes:
normal, inverted and flat (or humped). A normal
yield curve is one in which longer maturity bonds
have a higher yield compared with shorter-term
bonds due to the risks associated with time.

4. Inverted yield curve
An inverted yield curve is one in which
the shorter-term yields are higher than
the longer-term yields, which can be a
sign of upcoming recession.

5. Flat yield curve
In a flat or humped yield curve, the
shorter- and longer-term yields are
very close to each other, which is also
a predictor of an economic transition.

6. TERM STRUCTURE OF INTEREST RATES
EXPECTATIONS THEORY
• This is also called as the ‘Pure Expectations Theory’. This theory says that the long
rates are a tool to help forecast future short rates.
• So, you would get the same return if you invest in a two year bond as you would in
two one year bonds (a one year bond today and rolling it over in a one year bond
after one year).

7. LIQUIDITY PREFERENCE THEORY
• Demand for Money
• Time preference theory
• The investor requires a yield premium relative to short term bonds for he
mentioned risk to be incentivized to hold long term bonds.
• If liquidity is tight, rates would go up and if it’s loose, rates would go down or stay
flat.

8. MARKET SEGMENTATION THEORY
• No relationship between the markets for bonds with different maturity lengths and
that interest rates affect the supply and demand of bonds.
• The supply and demand for short-term government and corporate
bonds depend on the business demand for short-term assets such as accounts
receivable and inventories.
Preferred Habitat Theory
• If the expected returns on longer-term bonds exceed the expectations for shorter-
term bonds, investors who normally buy only short-term bonds will shift to longer
maturities to realize increased returns.

9. THANK YOU