Explain the yield curve and how it reacts to changes in interest rates, and can you explain why long-term (30-year) bonds generally trade at a higher yield than short-term maturities. Apply the forces of inflation, monetary and fiscal policy, trade deficit and foreign influences in your explanation© BrainMass Inc. brainmass.com October 9, 2019, 11:21 pm ad1c9bdddf
A yield curve is a graph that shows the relationship between bond yields and maturities.
When the rate of inflation is expected to decline, short-term rates are higher than long-term rates and the yield curve is downward sloping (Brigham & Houston, 2007). When the inflation has declined, all rates are lower and the yield curve becomes humped—medium-term rates are higher than either short- or long-term rates. When all rates fall and short-term rates drop below long-term rates, the yield curve is upward sloping.
Historically, long-term rates are generally above short-term rates because of the maturity premium, so the yield curve usually slopes upward or "normal" yield curve, and a yield curve that slopes downward is called inverted or "abnormal" curve.
Because maturity risk premium are positive, then if other things were held constant, long-term bonds would always have higher interest rates than short-term bonds.
Expected inflation has an especially important effect on the yield curve's shape, especially the ...
Yield curves and interest rates are explained. Why long-term bonds generally trade at a higher yield than short-term maturities are determined.