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BOND YIELD AND INVERSION, FINANCIAL SECTOR - Coggle Diagram

- - - - · The yield of a bond is the effective rate of return that it earns. But the rate of return is not fixed - it changes with the price of the bond.
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      - Relationship between Bond Price and Bond Yield: Bond yields go up when bond prices go down and bond yields go down when bond prices go up.
        
        · At the time of recession, investors find it suitable to invest in bonds which are safer instruments rather than investing in stocks or other riskier assets and therefore pushes up the bond prices. This leads to decline in bond yields.
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        So, government bond yields falling typically suggests that economic participants “expect” growth to slow down in the future.
      - · Relationship between Interest Rate and Bond Yield:
        
        Bond Yield is directly proportional to an interest rate in an economy.An increase in interest rate in an economy leads to an increase in bond yields.
        
        Yield Curve and Bond Yield Inversion
        
        · A yield curve is a graphical representation of yields for bonds (with an equal credit rating) over different time horizons.
        
        The steepness of the yield curve is determined by how fast an economy is expected to grow. The faster it is expected to grow, the more the yield for longer tenures.
        
        · When the economy is expected to grow only marginally, the yield curve is “flat”.
        
        · Bond Yield inversionis defined aswhen the yield on a longer tenure bond becomes less than the yield for a shorter tenure bond.
        
        An inverted yield curve shows that investors expect the future growth to fall sharply.