THE YIELD CURVE AND THE ECONOMIC INDICATION Essay

THE YIELD CURVE AND THE ECONOMIC INDICATION - Essay Example The paper goes ahead to examine the yield curve of the USA and the Australia. This paper is divided into two sections. Section a answers the task one and section be answers task two. Section A Introduction The economic analysis in the international world has been witnessing many fluctuations and changes over the years. To access and analyze and even predict these economic fluctuations and changes, economics have been put to task on coming up with the techniques of making economic predictions. Interest rates are factored in as one of the indicators of economic changes globally. They can therefore be for a short term and for long term as well. These interest rates changes give a good prediction on future market trend for instance a three year borrowing of a company which will be influenced by the central bank rates of borrowing and therefore being necessary to analyze the interest rates to see their input into the economy whether positively or negatively. These interest rates basically have a very significant effect on any company or industry economically. The interest rates are never constant and these changes fluctuate from the short term interest rates to the long term interest rates. These changes are well explained in the yield curve. The yield curve is the best indicator of economic activities and it is therefore necessary to have better understanding of this for the benefit of explaining the economic trend. In this paper therefore I will give a critical look at the Yield curve and as well the different types of yield curves and their effect on the economy globally. Yield curve The simplest way to define interest rate is that it is the amount charged on the money borrowed. This comes in form of rates and the maturity amount. The rate is the timely amount given before the actual payment as per the agreement of the borrower and the bank. The maturity amount is the total amount paid after the period given for the repayment of the l oan elapses. The yield curve is the representation of the interest that is representation of the long term and short term interest rates. It’s used to refer to the maturity of borrowings in the banking sector. This curve is plotted by using the interest rates and the maturity period. This curve provides a very crucial basis for the governments to evaluate their economies. It is very basic for the determination of the current and future economic status of a particular economy. It is used for the determining of many financial derivatives like lending rate and mortgages for borrowers. The analysis of the economy of a country will requires the inclusion of the yield curve so as to make it all conclusive. Types of yield curves There are various types of yield curve and it is worth looking at each of these 1. Upward sloping yield curve, This type of a curve is mostly used to show the inflation in the economy. It shows that there is a probability of inflation rising over the followi ng years. It can also