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In this lesson, students learned how to read a yield curve.
When looking at the yield curve, it has two major components – yield and term. The yield is found on the y axis and it represents the amount of interest that we’ll be paid for owning a particular bond. The term is found on the x axis and it represents the duration we would hold the bond at the specified yield.
Although reading a yield curve is fairly straight forward, many people fail to recognize its importance in determining the direction of the economy. As you saw in the video, the yield curve is flat or slightly inverted when a financial market is at its peak. Slightly before and after a market collapses, you would find the yield curve slope in a positive direction.
When we move into Course 2, Unit 3, it’ll be important to continue looking at the yield curve as we determine a metric for our “zero risk” investment – the 10 year federal note.