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The shape of a yield curve can take on one of four general shapes: (1) normal (or upward sloping), (2) inverted (or downward sloping), (3) flat, and (4) hump-shape.
The shape of the yield curve can be explained with one of the following three theories: (i) expectation theory, (ii) liquidity preference theory and (iii) market segmentation theory. According to the expectation theory, the shape of the yield curve depends on the expected future short-term interest rates. The following chart shows a normal upward sloping yield curve. By changing the expected future short-term interest rates (in the white cells), you can alter the shape of the yield curve. Experiment with different numbers to see how you can get the yield curve to take on one of the other three general shapes. |