A yield curve plots the yield to maturity (TYM) of similar debt securities, against the time to maturity (term). A normal yield curve is upward-sloping and shows higher yield for longer maturity due to the risks associated with the passage of time. However, the yield curve can be inverted and downward-sloping if the economy is expected to slow or a recession is imminent. Actual observed yield curves can be any kind of shape.
The term structure of interest rates refers to the relationship between short-term and long term interest rates. It connects monetary policy and investment decision as short-term interest rates are affected by monetray policy but investment depends on long-term interest rates. Three main theories explaining this relationship are:
