Par Yield Curve
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 financial market's need to analyze Treasury yields. As financial markets developed, investors required a tool to visually understand the yield changes of Treasury securities with different maturities, aiding in better investment decisions.
Categories and Characteristics: The par yield curve mainly has three types: 1. Short-term par yield curve, typically covering Treasury securities with maturities of up to one year; 2. Medium-term par yield curve, covering maturities from one to ten years; 3. Long-term par yield curve, covering maturities over ten years. Each type has specific applications and characteristics. The short-term curve is often used to analyze short-term interest rate changes and liquidity, the medium-term curve for assessing mid-term economic outlook, and the long-term curve for long-term investment and inflation expectations analysis.
Comparison with Similar Concepts: The par yield curve can be compared with the current yield curve and the forward yield curve of Treasury securities. The current yield curve reflects the yields of Treasury securities at current market prices, while the forward yield curve reflects the expected yields at a specific future time. The unique aspect of the par yield curve is that it assumes Treasury securities trade at par value.
Specific Cases: Case 1: Suppose an investor purchases a Treasury security with a par value of $1000, a coupon rate of 5%, and a maturity of one year. On the par yield curve, this Treasury security's yield is 5% because the coupon rate equals the yield to maturity. Case 2: Another investor purchases a Treasury security with a par value of $1000, a coupon rate of 3%, and a maturity of two years. On the par yield curve, this Treasury security's yield is 3%. Through these cases, investors can visually see the yield changes of Treasury securities with different maturities.
Common Questions: 1. Why does the par yield curve assume Treasury securities trade at par value? Answer: This simplifies the analysis, making the coupon rate equal to the yield to maturity. 2. How does the par yield curve differ from the current yield curve? Answer: The par yield curve assumes Treasury securities trade at par value, while the current yield curve reflects the yields of Treasury securities at current market prices.
