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Investment - Yield Curve
When investors try to estimate the right discount rate (yield to maturity or necessary rate of return) to value a particular corporate bond, they generally begin by looking at the yields to maturity offered by government bonds.
The term structure of interest rates, frequently referred to simply as the term structure, depicts how interest rates on government bonds fluctuate with maturity. The term structure is commonly displayed in graphical form, referred to as the yield curve.
The yield curve compares the yield to maturity of government bonds (y-axis) versus the maturity of these bonds (x-axis). It is vital when building a yield curve to ensure that bonds have similar features other than their maturity. In other words, the bonds assessed should simply differ in maturity.
A yield curve applied to US debt instruments is the US Treasury yield curve, which graphs yields on US government bonds by maturity.
Shown below is the US Treasury yield curve as of 19 July 2022. In this scenario, the yield curve is upward sloping in the short-term maturities before flattening off in the longer maturities.
When investors try to estimate the right discount rate (yield to maturity or necessary rate of return) to value a particular corporate bond, they generally begin by looking at the yields to maturity offered by government bonds.
The term structure of interest rates, frequently referred to simply as the term structure, depicts how interest rates on government bonds fluctuate with maturity. The term structure is commonly displayed in graphical form, referred to as the yield curve.
The yield curve compares the yield to maturity of government bonds (y-axis) versus the maturity of these bonds (x-axis). It is vital when building a yield curve to ensure that bonds have similar features other than their maturity. In other words, the bonds assessed should simply differ in maturity.
A yield curve applied to US debt instruments is the US Treasury yield curve, which graphs yields on US government bonds by maturity.
Shown below is the US Treasury yield curve as of 19 July 2022. In this scenario, the yield curve is upward sloping in the short-term maturities before flattening off in the longer maturities.
The term structure for government bonds, such as Treasury bonds, offers investors with a base yield to maturity, which serves as a basis to compare yields to maturity offered by riskier bonds. Relative to Treasury bonds, riskier bonds should pay higher yields to maturity to compensate investors for the increased credit or default risk.
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