Yield Curve Simplified

What this unit covers

Learn to read the shape of a real yield curve, normal or inverted, and what an inversion is popularly said to signal, held with due caution.

By the end you will be able to

• Identify whether a real yield curve is normal or inverted from its shape.
• Explain why lending for longer usually pays a higher yield.
• Distinguish a historical tendency from what a signal shows and how it can fail.

How it starts: A Chart That Tips the Wrong Way

1. A headline warns that a bond chart has flipped and trouble may be near.
2. Lending for 3 months now pays more than lending for 10 years.
3. Does this shape actually tell you what happens next?

Words you will meet

Yield curve

A line plotting interest rates of similar bonds against how long until each is repaid.

Maturity

How long until a bond repays the money lent to it.

Yield

The return a bond pays its lender, usually shown as a percentage.

Normal curve

A yield curve where longer maturities pay higher yields than shorter ones.

Inverted curve

A yield curve where shorter maturities pay higher yields than longer ones.

In this module: Interest Rates & Bonds

1. What Are Bonds?
2. Government vs Corporate Bonds
3. Interest Rates & Bond Prices
4. Yield Curve Simplified (this unit)