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The yield curve is defined as
the two-dimensional graph of the bond yields to maturity (YTM) as a function
of the maturity (Year) of bonds (with the same risk level).
You expect a positive slope curve as the longer the maturity, the greater
the bondholder exposure to risk. For this reason, bond issuers will pay more
(higher yield) to compensate investors for the risk involved with longer
maturities.
An inverted curve is
generally atypical, it indicates that by extending maturities investors are
taking greater risks for smaller returns. It indicates a worsening of the
economic situation. The shape of the yield curve is changing on a daily
basis with the changes in yield because of fluctuations in the rates of
interest market. Then, you can decide whether you are willing to invest in
long or short-term maturity bonds, based on the shape of the yield curve.
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