Current time:0:00Total duration:4:16

0 energy points

Studying for a test? Prepare with these 10 lessons on Stocks and bonds.

See 10 lessons

# The yield curve

Video transcript

If you were to borrow money
for different amounts of time, you could imagine the
person lending you the money might charge you
a different annual interest rate depending on the
perceived risk of having the money out there for
that amount of time. And the same thing is true
when people lend money to the federal government. So when you think about US
treasuries, and US treasuries that have different maturity. And maturity just means when is
the government going to pay you back, you could imagine that
there are different interest rates, or there's
different yields to maturity on that debt. So if we were to plot
it-- so let's say that, and I'm just going
to simplify here. Let's say that
there's some treasury debt that's maturing
in one month. And if you look at
the price that you would have to pay for that
debt versus the amount of money that the treasury is going
to pay you when it matures, you see that the yield there
is, let's say it is 1%. Let's say for treasuries
that are maturing in three months
the yield is 1.5%. Let's say the treasuries
that are maturing in, I'll just pick some
maturity dates here, let's say in one
year the yield is 3%. Let's do a couple more. Let's say in 10 years-- you're
essentially lending money to the treasury for 10 years
now-- the annual interest rate on that, let's
say it's, I don't know, let's say it's 3.5%. And let's throw
one more up here. Let's say if you were to lend
money to the US government for 30 years the yield is
running at, let's say it's 4%. So here we have different
yields for different maturities. And if we essentially
plot this on a graph, we get ourselves a yield curve. And it's usually
called The Yield Curve. When people talk
about The Yield Curve they're talking about the
plot for the US Treasury in dollars, US Treasury
bills and bonds. You can have a
yield curve really for any debt instrument, for
any corporate bonds, or even government securities
or corporate securities of other countries. But in general, when they
talk but The Yield Curve, they're talking
about US treasuries. So let me draw a yield
curve right over here. So on this axis I
will put maturity. Let me scroll down a
little bit, so maturity. And we have a bunch of
different maturities. We have one month. Let's squeeze it, one month. We have three months. And this will be
completely to scale. Then we have one year,
actually one and three month, let's just put one month
right at the beginning. So one month then three months
is a little bit further out. One year would be right
over here one a year. Five years would be like there. I don't have five years,
let's do a 10 years. So I'll extend my line over. So one year, maybe 10 years
is over here, 10 years. And then you have 30 years. And I'll just draw 30
years as far as I can. It's not completely to
scale, but it's my best shot. And then we plot the yield for
those different maturities. So in one month,
you have a 1% yield. So let me do up the
percentages here. So this is 1%, 2%, 3%, 4%. So on one month maturity
the yield is 1%. On three month maturity
the yield is and 1/2%. So maybe it'll be
like right over there. On one year maturity
the yield is 3%. So you plot one
year, this is 3%. Let me write it, this
is 3% right over here. This is 1.5% right over there. And the first one right
over there was 1%. And then at 10 years
it's 3 and 1/2%. So 3 and 1/2% is
right over here. And we want that to be 10 years. So I'm just plotting that point. And then that 30 years, it's 4%. So 4% is what we
get at 30 years. And if we connect the
dots and draw a curve we are giving ourselves
The Yield Curve. I don't want to make
it look like-- let me see how well I can draw it. You have a curve that might
look something like that. Just by looking at
this yield curve, you see that when you lend money
to the treasury for a longer period of time, you're going to
get a higher interest than you would for a shorter
period of time.