Hi guyz,
A wrong question at this point in time, but hope to get some help.
What is a yield curve and how is this different from interest rate?
Yield curve is a graphical plot of interest rates (y) and maturity (x).
Honestly, how did you get past level II?
I meant how is it computed. If Yield curve goes up - does the price of the security and IR goes up too ?
The yield curve is a PLOT of interest rates and maturity.
If the yield curve shifts up in a parallel move, then all interest rates at all the different maturities move up in the same magnitude. And if interest rates go up, then fixed asset prices go down.
If that still doesn’t make sense, google yield curves or something, I don’t think you have time to review L1 and L2 material.
The Yield Curve is a plot of Interest Rates on Bonds (government bonds) against its various maturities. Interest Rates in general can mean the policy rate which is adjusted by the central bank of the respective economy like the Fed Funds in the US, Repo Rates in India etc.
So you can say that if interest rates go up the yields and thus the yield curve also moves along with them since ultimately it’s a function of these interest rates. For simple academic purposes we consider the interest rates and yields as the same.
And secondly, if interest rates go up, prices of bonds fall except for rare cases where the demand for those bonds is so high that prices go up even if rates increase and other strange reasons.
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By Interest Rates on Bonds (governemnt bonds) I mean yields on these bonds.
I’d like to add that the yield curve is not exclusive for treasuries. It plots the yields for any relevant asset class or issuer.
However, for exam purposes, it is not heard of that the yield curve means anything but the treasury yield (par) curve.
Because there is never a time when bonds of all maturities are available on the market, the yield curve has to be interpolated/extrapolated from whatever bonds exist at a given time. So parts of it are, in fact, calculated.
By the way, this explains why different sources will give slightly different yield curves: they use different methods for the interpolation/extrapolation.
Finally, for whatever it’s worth, when people talk about “the yield curve”, they generally mean the par curve (as opposed to, say, the spot curve).
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Thanks a ton ppl… can I say this to conclude the topic-
that if in the exam if the say that Yield curve is going up that means IR is going up & price is going down?
Yup.