Introduction to the yield curve | Stocks and bonds | Finance & Capital Markets | Khan Academy

Welcome back Before proceeding further I hope you will be very Like to invest in mortgage securities Have a better understanding Mortgage securities here means lending money to those people Used to buy a house that has been rising in value I think we need to know more analysis tools So I'm here to introduce you The concept of the yield curve You may have heard it before You may have heard someone talk about it on CNBC (Financial Channel) The next 5 to 10 minutes You will learn a lot about the yield curve When people talk about the yield curve They mostly refer to the Treasury bond yield curve What does that mean? What is a national debt? Whether it is short-term government bonds Medium-term government bonds or long-term government bonds are national bonds These are issued by the federal government for borrowing They are all considered risk-free Because if you lend money to the federal government If the government is short of cash Then it will be able to increase tax To pay off the debt and return the money to you Therefore, short-term Treasury bonds are Medium-term government bonds and long-term government bonds Safer than you lend money to anyone else When most people are talking about the yield curve They refer to the risk-free yield curve They refer to the yield curve of national debt That's it for the definition So short-term government bonds and medium-term and long-term government bonds What is the difference between? They lent money to the government It's just that the maturity time of each loan is different If I gave a loan to the government The fund of 1,000 yuan expires in 6 months Then it is (purchased) short-term government bonds I loaned 1,000 yuan to the government The government will give me a short-term government bond as a loan certificate Short-term government bonds Is essentially an IOU that says I will return the money in six months And attach a certain amount of interest Similar if it is 3 months expiry It is a 3-month short-term national debt The maturity of medium-term government bonds is between 1 and 10 years In this chart We will use the actual yield curve 0 to 1 year In fact, there are no 0-year short-term government bonds The shortest is 1 month short-term Treasury bonds As marked in the chart here (The maturity time is) One month to one year is short-term national debt Here is a definition One year to ten years are medium-term government bonds In fact, I think 1-year bonds are also medium-term government bonds Short-term Treasury bonds within one year I might get it wrong sometimes If I am wrong, please contact me This is just a matter of definition Medium-term Treasury bonds are maturing from one to ten years Then 10 years and above So-called long-term national debt This is all by definition After solving this problem Let's talk about what the yield curve is I have a simple question to test you If I lend money to someone for only one month Compared with lending him a year In which situation should I take more risks? Of course if you only lend him one month There cannot be too many things happening in this month So I can only get less interest rate compensation Obviously not only when the U.S.

Dollar is the denominated currency Even other currencies are only the difference in time For a one-month loan, I can only reduce interest It is important to come to this conclusion When I said that for a one-month loan, I asked for a 6% interest rate It’s not that one month later That person paid me 6% interest on the loan amount It means that I loaned the money to someone for a month A month later he returned the money to me Then I lend the money (the same amount of principal) to another person Or one month and one month later to lend to another person Keep cycling for a year In total, I will get 6% interest on the loan principal No matter how long the expiration time is One month or one year, five years, fifteen years We are talking about the rate of return (interest rate) Both refer to the average yield that can be obtained in a year Annual rate of return Back to my previous question I lend someone money even the government's one month due Usually the risk is small What happened in a month Much less than in a year More inflation may occur in a year The dollar may collapse I may always look for good investment opportunities So I may use this money in a year However within a month I'm pretty sure I don't need this money All in all, when you borrow money for short-term, it is better than long-term borrowing.

The required interest rate should be low So let’s draw the yield curve and see if this conclusion is correct I actually checked the website of the Ministry of Finance This is the website of the Ministry of Finance These are the yields of national debt It said that March 14th is the closest time to now I will mark it As mentioned above, if you lend money to the government for a month The annual rate of return you will get is 1.2% Please remember that it does not mean lending 1,000 yuan You can get 12 yuan interest after one month This is the annual rate of return that can only be circulated for one year Get 1.2% interest Let’s take a look at the low interest rate for three months Six months is a bit more It seems that the overall trend is As I expected the money I lent to the government As the expiration time gets longer The interest rate returns are getting bigger and bigger The abnormality here is interesting One month is better than three month Interest rate We will do a more in-depth explanation in the future Explain why investments with longer maturities Why is the rate of return still smaller The so-called reverse yield curve Let's draw it and see how it looks like? You see where I got the information It says that the monthly (annualized) interest rate is 1.2% This is one month 1.2 here Three months here The six-month (annualized) interest rate is 1.32% May be here 1.37% for one year here 2.37% of the five-year period May be here That's not all I will not mark all of them for simplicity The 10-year period is 3.44% May be here 4.3% for the twenty-year period here 4.35% over 30 years The (annualized) yield curve looks like this So far you at least understand What is the yield curve? Show it with a simple diagram Maybe someone will say after seeing I can see that overall What's the interest rate I loan to the government Is a risk-free interest rate Or an interest rate when we expect risk-free Then I lend the money to the government What about (changes) the interest rate at different maturity times? We can get this from the yield curve Generally speaking, it slopes upward As i said Because when you lend money for a long time You will take a lot of risk Do you think many things will happen during this long period of time You might need to use that money Inflation may occur The dollar will depreciate There are many other things that can happen The next question is What determines the yield (curve)? When the Ministry of Finance is the government When it needs to borrow money, it will say Hey everyone, I need to borrow one billion from you Because we can’t control spending anymore (financial deficit) They will borrow a 1 billion fund Return in one month That is (issued) one-month short-term government bonds Raise a billion yuan They hold an auction Investors from all over the world participate They will say yes It’s safe for me to invest my money here for a month Therefore, the rate of return can be determined according to demand If many people want Buy one-month short-term Treasury bonds Yield will become smaller Can you understand? Think about it If many people want to buy That is, compared to the supply demand, Then the government can pay a lower interest rate Similar for some reason People don’t want to invest money in dollar assets they think Debt default in the U.S.

One day So not many people want to invest money in U.S. Treasury bonds Then in this auction The government has to Pay a higher interest rate For investors who invest in government bonds Maybe the interest rate at auction is here Similarly, the government conducts different expiration times Debt auction I mean the expiry time The period for you to lend to the government They will do 1 month (debt auction is the issuance of national debt) 3 months 6 months 1 year, 2 years, 3 years, etc. Once the government auction is successful That means you lent the money to the government It will give you a loan receipt called a treasury bond Then you can trade (secondary market) with other people This determines the size of the interest rate in the short term Then the government issued the national debt After the release There are still many people who have demand for national debt Makes many people (holding national debt) very excited Because in the open market when you try to sell the national debt Think about it and get Higher yield I know it might be a little complicated here Many times I always like to take a (knowledge) jump Back to the main point of this lesson I hope you have a better understanding of the yield curve Do you know what short-term national debt is Medium-term government bonds and long-term government bonds For why the yield curve is shaped like this Also have an intuitive understanding Ok see you next class