Yield curve shift, Financial Management

Assignment Help:

The relative change in the yield for each treasury maturity is known as a shift in the yield curve. When the change in the yield for all the maturities is same, then there is a parallel shift in the yield curve; and when there is change in yield for all the maturities is not same, then there is a non-parallel shift in the yield curve.

There are two types of non-parallel yield curve shifts:

  1. A twist in the slope of the yield curve refers to the flattening and steepening of the yield curve. When the slope of yield curve decreases then it is known as flattening of the yield curve. When the slope of yield curve increases then it is known as the steepening of the yield curve.

  2. The second type of non-parallel yield curve shift is a change in the humpedness or curvature of the yield curve. These shifts involve the relative movement of yields at the long and short maturity sectors of the yield curve relative to the intermediate maturity sector of the yield curve. Such kind of non-parallel shift which changes the curvature of the yield curve is known as butterfly shift. Here, the intermediate maturity sector can be viewed as the body of the butterfly, and the short and long Maturity Sectors can be viewed as the wings of the butterfly.

Figure 1: Parallel Shifts of the Yield Curve

2017_parallel shift.png

Figure 2: Non-Parallel Shifts of the Yield Curve

(a) Flattening

1734_non parallel shift.png

(b) Steepening

1450_steepning.png

(c) Butterfly Shift (i) Positive

933_butterfly shift.png

(d) Butterfly Shift (i) Negative

631_butterfly shift1.png


Related Discussions:- Yield curve shift

State expectations theory of term structure of interest rate, State the exp...

State the expectations theory of the term structure of interest rates. Expectations theory: The expectations theory of the term structure of interest rates specifies that

Report on bank''s predicts of exchange rates, Q. Report on bank's predicts ...

Q. Report on bank's predicts of exchange rates? Report on banks' predicts of exchange rates. The three banks have produced extensively differing forecasts which even involve

Gordon''s dividend equalisation model, If the EPS is Rs.5, dividend pay-out...

If the EPS is Rs.5, dividend pay-out ratio is 50%, cost of equity is 20% and growth rate in the ROI is 15%. What is the value of the stock as per Gordon's Dividend Equalisation Mod

Review of career plans, Review of career plans: career plans, emerging out ...

Review of career plans: career plans, emerging out of career planning exercise, have long term orientation. A career plan is developed based on assumptions about how the environmen

Participants in hedge funds, Participants in Hedge Funds: The Sponsor ...

Participants in Hedge Funds: The Sponsor and the Investors Sponsors are promoters and generally, they hold a profit share on percentage for the capital invested in the Fun

risk/return profile of the convertible security, Let us consider thr...

Let us consider three scenarios of changes in stock prices and look into the risk return profile of the convertible security. Let us assume that the stock prices

Current yields for treasury bond, ACT presently is all-equity financed. Thi...

ACT presently is all-equity financed. This reflects the stance of the former CEO, a dominant personality who stated repeatedly: "I don't want us to be in thrall to the demands of t

What is the rationale of the double-play strategy, Q. What is the rationale...

Q. What is the rationale of the double-play strategy? The hedge funds deploy a double-play strategy in order to engineer steep increases in interest rates and steep declines in

Senior versus subordinate bonds, This is again a distinction which be...

This is again a distinction which becomes important in case of a default. The senior bondholders have to be paid before the subordinate bondholders. This means th

Accept-reject rule, Accept-Reject Rule: The decision rule is to accept ...

Accept-Reject Rule: The decision rule is to accept the project if the computed payback period is less than the standard.  If not, reject it.  While ranking the projects, projec

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd