The Yield Curve Flashcards
YIELD CURVE
Line that plots the yields (interest rates) of bonds having equal quality (taxes/credit/liquidity) but with different maturity dates.
YIELD SPREAD
Difference between yields on differing debt instruments on varying maturities, credit ratings, and risk levels.
CREDIT SPREAD
Difference in yield between bonds of similar maturities but with different credit qualities.
TIME PERIOD
CALENDAR SPREAD
Low-risk, directionally neutral options strategy that profits with the passage of time and/or in increase of implied volatility.
LIQUIDITY SPREAD
Described the premium that flows into a party that is willing to provide liquidity to the party demanding it.
NORMAL YIELD CURVE
UPWARD SLOPING
Curve in which longer maturity bonds will have higher yields in comparison to short-term bonds due to high risks associated with time.
FLAT (YIELD)
Both short/long-term yields are close to each other (sign of economic transition).
INVERTED YIELD CURVE
DOWNWARD SLOPING
Curve in which short-term yields are higher than long-term (sign of economic recession).
EXPECTATIONS THEORY
SLOPE OF CURVE EFFECT
Slope of the curve is related to the expectation of the market about the future interest rates, and implicitly, the business cycle.
LIQUIDITY PREFERENCE THEORY
SLOPE OF CURVE EFFECT
Yield curve will be sloping slightly upward even when short-term rates are expected to remain constant.
MARKET SEGMENTATION THEORY
SLOPE OF CURVE EFFECT
Short/long-term interest rates are not related to each other and should be viewed separately like items in different markets for debt securities.
IMPLICIT YIELD
Calculated based on the current term structure of interest rates, working from the assumption that the yield curve is an unbiased estimate of the bond’s return.
DISCOUNT WINDOW
Central Bank lending facility meant to help commercial banks manage short-term liquidity needs. Banks borrow at Fed discount rate.
CME FEDWATCH TOOL
Barometer for the market’s expectation of potential changes to the Fed Funds target rate while assessing potential Fed movements around FOMC meetings.
