Abstract
A yield curve is a curve which represents graphically the interest rate of same quality of credit bond related to a precise moment. The point is that those bonds have not the same date of maturity (long-term and short-term rates). The yield curve represents the price of what we can call "the price of liquidity renunciation".
The more the renunciation is on a long period (for an example a long-term bond); the more the interest rate is high. That means that the bond given by companies or states on long period (like 10, 20, or 30 years) must offer higher remuneration than the ones proposed by bank placements or short-term placements (less than one year) to be attractive. In fact, the investor will not get its money back for a long time in the case of long-term bonds, and they may want some advantages not to have this money as liquidity for such a long time.
The difference between bond's interest rates is due to the fact that bonds have different credit risks, liquidity, and taxation. The one which is most used is the treasury dept. It is used as a reference to compare other rates in the market, notably mortgages or banks' ones. It is also used to analyze and anticipate upcoming changes that are going to affect directly the economy.
What is the yield curve and what does it tell us?
