Yield curve
To interpret a yield curve, keep currency, credit quality and other material terms comparable. An upward-sloping curve shows higher yields at longer maturities; an inverted curve shows the reverse. Expectations about future short rates, term or liquidity premiums and supply-and-demand conditions can influence its shape. A curve is not a guaranteed forecast. Distinguish spot rates for individual maturities from yields to maturity on coupon bonds. Corporate debt often trades at a spread over an appropriate government or benchmark curve because of credit and other differences.
Worked example
Comparable one-, three- and five-year instruments yield 3%, 3.6% and 4.1%. The curve is upward sloping. It does not follow that the one-year rate must be exactly 4.1% in four years, because longer yields may include premiums and other influences.
Common mistake
Comparing debt with different currencies or credit risks and attributing the entire yield difference to maturity.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |