Answer to Question #236698 in Macroeconomics for Comfort

Question

Draw and explain the yield curve that represents the relationship between short and medium term bonds.

Answer 1

Solution:

A yield curve is a line that plots the yield of bonds having similar credit quality but different maturity dates.

A yield curve that represents the relationship between short- and medium-term bonds is known as a normal yield curve. It indicates the relationship between changes in bond yields with different maturity times. A normal yield curve indicates yields on longer-term bonds may continue to rise. A normal yield, therefore, starts with low yields for shorter-maturity bonds and then increases for bonds with a longer maturity, sloping upwards. The slope will move upward to represent the higher yields usually associated with long-term bonds.

 

This is depicted by the below normal yield curve: