Yield Curve

In controlling money, the yield curve is the link between the cost of borrowing and the interest rate i.e. the cost of acquiring money and the time from the maturity stage till the time amount is paid off (Campbell, 2008). E.g., the current USD interest rates paid on treasury securities of the US for various maturities are closely spectator by many traders/spectators, and are sequentially plotted on a graph with a systematic X and a Y curve called the yield curve; the curve determines the trend of the points plotted on the graph. More formal mathematical descriptions of this connection are often called the structure of termed interest rates.

The yield of a debt instrument is the annual percentage increase in the value of the amount invested in a business. For instance, a bank account that pays an interest rate of 4% per year has a 4% yield, which applies for all banks with variable interest rates. In general the percentage per year that can be earned is dependent on the time taken for the money to be invested. For example, a bank may offer a savings rate (usually offered on savings account) higher than the normal checking account rate if the customer is prepared to leave money untouched for five years i.e. the amount of untouched money is bound by the bank and cannot used be used by the customer till the contract period of five years is completed. Investing for a period of time gives a yield Y (t) (Used in mathematical formulas).

The function Y is called the yield curve, it is often but not always used as an uprising trend also called time (Usually represented as the alphabet t). Yield curves are used, sketched and expressed by fixed income analysts and financial analysts usually hired by bank for financial speculations, future outcomes, forecasting and financial hazards, who analyze bonds and related securities. Economists use the curves to speculate economic conditions i.e. the boom and recession situations or another hazard that is going to hit the economy.

The yield curve function Y is actually only known with certainty for a few specific maturity time periods, while the other maturities are calculated by exclamation, i.e. the mark or symbol used to express the maturity time period. (Analyzing and Interpreting the Yield Curve (Wiley Finance) by Moorad Choudhry

There is no single yield curve describing the cost of money i.e. the real value for money for everyone, be it a garbage cleaner of CEO at a huge organization, in the eyes of the economy both are income earners, the only difference is in their life style and standards but both are treated as independent individuals. The yield curve also called the government curve sometime remains stagnant that means there are no hitches (good or bad signs in a particular situation). One of the important factors for the yield curve that has to be considered is the currency in terms of which the yield curve is made, the exchange rates used to express the currencies e.g. changing Pakistani rupee in to United States Dollar. The situation for which the yield curve is made it is necessary for the analyst to include primary or what we call the key factor with out which the purpose of the yield curve is void. Different organizations borrow money at different rates, depending on their credit worthiness and reputation in the market where they work and deal with clients.

Usually the details of the yield curve are further out sourced to the inter bank of London because the rates if London inter bank are supposed to be the most reliable and feasible rates in the whole world. These are also called the commercial curves (Charles, 2003). These are made and compared from the yields of bonds issued by organizations and financial organizations. These yield curves are typically higher then expected because the organizations have less credit worthiness than the government because government pumps money from various sources and is a more reliable source to return money to its creditors.

Shortcomings of expectations theory – this theory rejects the return on the bonds of the investment. The risks and hazards may involve, Interest rate risk, the interest may fluctuate, ether too high or either too low, both the situations tend to be risky and dangerous for the spectators.

Invest in improving businesses rate risk, it may be the interest rate is fluctuating and create hindrances in the operations of the businesses be it internal or external, these risks tend to be fatal at times for the institutions.