Par Yield Curve

A par yield curve is a graphical representation of the yields of bonds with different maturities, when all of the bonds have the same coupon rate. The par yield curve is also known as the spot yield curve or the zero-coupon yield curve.

The par yield curve is important because it shows the relationship between the time to maturity and the yield of a bond. This relationship can be used to estimate the future value of a bond and to compare the yields of different bonds.

The par yield curve is typically upward-sloping, which means that the yields of bonds with longer maturities are higher than the yields of bonds with shorter maturities. This is because longer-term bonds are more risky than shorter-term bonds, and investors require a higher yield to compensate for the additional risk.

However, the par yield curve can also be downward-sloping or flat. A downward-sloping par yield curve occurs when the yields of bonds with longer maturities are lower than the yields of bonds with shorter maturities. This can happen when investors are pessimistic about the future and they are willing to accept lower yields in exchange for the safety of shorter-term bonds.

A flat par yield curve occurs when the yields of bonds with different maturities are all the same. This can happen when investors are uncertain about the future and they are not willing to pay a premium for either longer-term or shorter-term bonds.

The par yield curve is a useful tool for understanding the relationship between the time to maturity and the yield of a bond. It can also be used to compare the yields of different bonds and to estimate the future value of a bond.