What is Par Yield Curve?
1101 reads · Last updated: December 5, 2024
A par yield curve is a graphical representation of the yields of hypothetical Treasury securities with prices at par. On the par yield curve, the coupon rate will equal the yield to maturity (YTM) of the security, which is why the Treasury bond will trade at par.The par yield curve can be compared with the spot yield curve and the forward yield curve for Treasuries.
Definition
The par yield curve is a graphical representation of the yields of hypothetical Treasury securities purchased at par value. On the par yield curve, the coupon rate equals the security's yield to maturity (YTM), which is why Treasury securities can trade at par value.
Origin
The concept of the par yield curve originated from the need in financial markets to analyze Treasury securities' yields. As financial markets evolved, investors required a tool to visually compare yields of Treasury securities with different maturities, leading to the development of the par yield curve.
Categories and Features
The par yield curve is primarily used to analyze the yields of Treasury securities. Its features include: 1. The coupon rate equals the yield to maturity, 2. It applies to Treasury securities traded at par value. The advantage of the par yield curve is its simplicity and clarity, while its limitation is that it only applies to specific types of securities.
Case Studies
Case 1: During a certain period, the par yield curve for short-term U.S. Treasury securities showed a flat shape, indicating stable market expectations for short-term interest rates. Case 2: During a financial crisis, the par yield curve might steepen, reflecting market expectations of rising future interest rates.
Common Issues
Common questions from investors include: What is the difference between the par yield curve and the present value yield curve? The par yield curve applies only to Treasury securities traded at par value, while the present value yield curve considers market price fluctuations.
