Business, Legal & Accounting Glossary
Yield elbow is a term related to the concept of yield curve. Yield elbow is referred to as a point on the yield curve where the interest rate is highest. Yield elbow can be used as a measure that can indicate the year in which the economy’s maximum interest rates occurs. Thus, yield elbow can be termed as the peak of the yield curve.
In order to analyze the term yield elbow, it is necessary to have a clear notion of the concept yield curve. The yield curve can be referred to as the relation between the interest rate of any debt and the time of maturity of that debt. In simple terms, the Yield curve can be referred to like a configuration of interest rates. The yield curve can be used to plot the existing U.S. dollar interest rates paid on U.S. Treasury securities for a range of maturities.
Yield for any year is a function of the time period (t). Thus, Y(t) is a function of time period t and Y is the yield curve. Yield elbow is the point where there is the highest interest rate. Yield elbow is used by income analysts for analyzing bonds and securities. Yield elbow can also be useful in understanding the conditions of financial markets.
Characteristic of any yield curve is usually asymptotically upward sloping. This can be explained as the longer the maturity period, the higher is the yield accompanied by diminishing marginal growth. This characteristic of the yield curve has two explanations- Firstly, the market always anticipates a rise in risk-free rates and in such case if investors refrain from investing now then they can receive a higher return in future. Thus here exist an arbiter pricing theory, under which an investor who is willing to invest their money in present need to be remunerated for the anticipated rise in rates. Thus, we find higher interest rate on long-term investments. Secondly, longer periods of maturities are accompanied by greater risks for the investor. Apart from upwardly sloping, the yield curve can also be flat or hump-shaped that depicts the stability of anticipated interest rates.
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This glossary post was last updated: 28th March, 2020 | 4 Views.