Sample Essay

A popular explanation for this is that with time, investors find greater risk in putting their money in bonds and hence require an increased risk premium for investing. Hence, yield curve goes up with time. Another one is that the market is speculating risk free rate to increase, because of which if investors delay investment, they may get greater returns. Therefore those investors who choose to invest at this time need to get compensation for the future rise in risk free rate, leading to a rise in the rate on long term securities. The curve can otherwise be flat, steep or inverted.

The shape of the yield curve could be described as relatively steep following 2002. It however began to flatten out over the years coming to 2004. It continued to flatten over the following time with the Fed increasing short term rates but keeping longer term interest rates low.

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