Mastering Python for Finance

Yield curves

In a normal yield curve environment, long-term interest rates are higher than short-term interest rates. Investors expect to be compensated with higher returns when they lend money for a longer period since they are exposed to higher default risk. The normal or positive yield curve is said to be upward sloping, as shown in the following graph:

In certain economic conditions, the yield curve can be inverted. Long-term interest rates are lower than short-term interest rates. Such a condition occurs when the supply of money is tight. Investors are willing to forgo long-term gains to preserve their wealth in the short term. During periods ...