More on Interest Rates
When investing in bonds, understanding their yield is of utmost importance. They reflect the length and interest to be paid to the investor. Here you will learn why yields are indicative of investors' expectations. How would you estimate interest rates in the future using the yield curve?
Using the Yield Curve to Estimate Interest Rates in the Future
Defining the Yield Curve
For debt contracts, the overall duration of time of the debt security coupled with the interest rate compounded over that time frame will illustrate the overall yield of the security during its lifetime. This is referred to as a yield curve. When this is applied to U.S. treasury securities in respect to interest rates, useful information regarding projected interest rates in the future over time can be estimated. This is carefully monitored by many traders, and utilized as a point of comparison or benchmark for other investments (particularly valuation of bonds).
Yield Curve Example: This yield curve from 2005 demonstrates the projected yield over time of USD. As you can see, this is a typical yield curve shape, as the longer the contract is held out the higher the rate of return (with diminishing returns).