What is the yield curve? What are the components of interest rate?

The yield curve shows the relation between the interest rates and maturity dates. Yield curve is usually upward sloping, but it can also be downward sloping or horizontal line.

An interest rate is composed of sum of;

  • real risk-free rate
  • inflation premium
  • liquidity premium
  • default risk premium
  • maturity risk premium

normal-yield-curve