9.c Yield Curve and Implied Forward Rates

Yield Curve

A graph that shows the relationship between interest rates and the maturities of debt securities.

Implied Forward Rates

Interest rates that are calculated based on current interest rates and expected future rates.

Upward Sloping Yield Curve

A yield curve that indicates longer-term securities have higher interest rates than shorter-term securities.

Inverted Yield Curve

A yield curve that occurs when longer-term interest rates are lower than short-term rates, often seen as a recession indicator.

Expectations Theory

A theory suggesting that long-term interest rates are averages of short-term interest rates based on investor expectations.

Term Structure

The relationship between the yields of zero-coupon instruments and different maturities.

Flat Yield Curve

A yield curve where short-term and long-term securities have similar interest rates.

Market Segmentation Theory

A theory that argues that the yield curve is shaped by the supply and demand for loanable funds of various maturities.

Two-ten spread

The difference between the interest rates of 10-year and 2-year securities.

Spot-Futures Parity

A relationship that ensures that the price of a spot asset and its futures contract are aligned to prevent arbitrage opportunities.