The paper "Relationship of Interest Rates, Term to Maturity, and Marketability Financial Instruments" is a good example of finance and accounting coursework. The shape of the yield curve is determined by a different economic factor that includes the rate of interest, the expected inflation rate, and the interest rate risk. The business cycle depends on the variation of the real rate of interest. The highest rates are observed, especially at the end of the business expansion period, whereas during the business recession, it is the lowest real rate of interest.
The shape of yield curve experiences some slope changes with the changes in the expected future real rate of interest. The other economic factor influencing the shape of the yield curve is the expected inflation rate. The financial instrument investors use the economic variables to determine the expected rate of inflation (Thomas, 2006). If the projection of investors indicates that inflation would increase in future, then the yield curve shape becomes upward sloping. This is due to long-term interest rates that include the larger inflation premium comparing to short-term interest rates. In addition, if the inflation subsidy is expected in the future, then the investors would consider investing more and hence leading the yield curve to be downward sloping (Chinn & Kucko, 2015).
Finally, the interest rate risk is greater when the maturity of security is longer and hence leading to a higher interest rate. This is indicated by an upward slope of the yield curve as a result of the interest risk premium. Marketability is the ability of the investor selling their financial instruments quickly at fair market value and a lower transaction cost.
Higher marketability of the securities is achieved when their costs are low. In a competitive financial market, the relationship between marketability and securities are varied inversely to interest rate and yields (Gogas, Papadimitriou, & Chrysanthidou, 2015). The marketability risk premium is the yield given by interest rate obtained from the difference of marketable security and marketable financial instrument or security. In reality, the United States Treasury Bills are the securities that have the largest and most attractive secondary market. The term structure of the rate of interest is developed by the relationship of yield and term of maturity of securities.
The variation of the term to maturity of the interest rate is indicated by the changes in the yield curves (Saar & Yagil, 2015). This ensures that changes to the interest rates are constant over a period and hence defining the yield curve. The yield curve tends to take different slopes up and down slopes depending on the general level of the rate of interest over time. Yield curve takes different shapes with respect to the marketability, the rate of interest and the inflation expectation (Claggett, 2016).
The upward sloping or normal yield curves happen in the growing economy, whereas a flat yield curve occurs when the rate of interest is stable and unlikely to change soon. An inverted yield curve that is also known as the descending curve is downward sloping and occur when the business cycle is approaching a recession or the decline of the economy.
Chinn, M., & Kucko, K. (2015). The Predictive Power of the Yield Curve Across Countries and Time. International Finance. Vol. 18 Issue 2, 129-156.
Claggett, T. (2016). A TUTORIAL ON BONDS, YIELD CURVES AND DURATION. Journal of Business & Behavioral Sciences. Vol. 28 Issue 1, 49-61.
Gogas, P., Papadimitriou, T., & Chrysanthidou, E. (2015). Yield Curve Point Triplets in Recession Forecasting. international Finance. Vol. 18 Issue 2, 207-226.
Huxley, S., Burns, B., & Fletcher, J. (2016). Equity Yield Curves, Time Segmentation, and Portfolio Optimization Strategies. Journal of Financial Planning. Vol. 29 Issue 11, 54-61.
Saar, D., & Yagil, Y. (2015). Corporate yield curves as predictors of future economic and financial indicators. Applied Economics. Vol. 47 Issue 19, 1997-2011.
Thomas, L. B. (2006). Money, banking, and financial markets. Mason (OH): South-Western, cop.