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Types of yield curves

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1.Normal Yield Curve
A normal or up-sloped yield curve indicates yields on longer-term bonds may continue to rise,
responding to periods of economic expansion. When investors expect longer-maturity bond
yields to become even higher in the future, many would temporarily park their funds in shorter-
term securities in hopes of purchasing longer-term bonds later for higher yields. In a rising
interest rate environment, it is risky to have investments tied up in longer-term bonds when their value has yet to decline as a result of higher yields over time. The increasing temporary demand for shorter-term securities pushes their yields even lower, setting in motion a steeper up-sloped normal yield curve.

2.Inverted Yield Curve
An inverted or down-sloped yield curve suggests yields on longer-term bonds may continue to
fall, corresponding to periods of economic recession. When investors expect longer-maturity yields to become even lower in the future, many would purchase longer-maturity bonds to
lock in yields before they decrease further. The increasing onset of demand for longer-maturity
bonds and the lack of demand for shorter-term securities lead to higher prices but lower yields on longer-maturity bonds, and lower prices but higher yields on shorter-term securities, further inverting a down-sloped yield curve.

3.Flat Yield Curve
A flat yield curve may arise from normal or inverted yield curve, depending on changing
economic conditions. When the economy is transitioning from expansion to slower development
and even recession, yields on longer-maturity bonds tend to fall and yields on shorter-term
securities likely rise, inverting a normal yield curve into a flat yield curve. When the economy is transitioning from recession to recovery and potential expansion, yields on longer-maturity bonds are set to rise and yields on shorter-maturity securities are sure to fall, tilting an inverted yield curve toward a flat yield curve.

Titany answered the question on November 12, 2021 at 08:03

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Types of yield curves

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