Yield Curve

CFA Level I Fixed Income
#1

Dear All

How does an upward sloping yield curve mean that rates in the future will go up, and which rates? doesn’t it just mean that longer maturities require higher rates as compensation. And how does that relate to the forward curve.

Thanks

#2

a bond portfolio’s yield to maturity increases as the maturity of the portfolio increases, how why??

#3

There are lots of theories about the shape of the yield curve.

One of them – Pure Expectations – says that today’s long-term interest rates will be tomorrow’s short-term interest rates: February’s 6-month forward rate starting 6-months from now will become the 6-month spot rate in August.

There are other theories that don’t believe that that will happen.

#4

thanks S2000magician

But thats my question, why does the theory state todays long term interest rates will be tomorrow short term interest rate. I thought they are higher cause you have to be compensated more for locking in your money longer, what does it have to do with what short term rates will be in the future?

#5

You’re welcome.

It doesn’t say that today’s long-term interest rates will be tomorrow’s short-term interest rates. It says that today’s _ short-term forward rates will be tomorrow’s short-term spot rates_.

It’s just a theory: a guess about how interest rates evolve over time. And, as I said, it’s just one of many theories that try to explain the shape of the yield curve.

That’s another theory: Liquidity Preference.

There’s also Preferred Habitat, and others. All guesses trying to explain the shape of the yield curve.

Nothing.

Different theory.