Banker's Glossary
Yankee bonds
Bonds denominated in U.S. dollars and issued in the United States by foreign issuers for U.S. investors.
Yankee CDs
Certificates of deposit denominated in U.S. dollars and issued in the United States by a U.S. branch of a foreign financial institution. See Eurodollar CDs.
Yield
The annual return on an investment expressed as a percentage on an annual basis. For interest-bearing securities, the yield is a function of the rate; the purchase price; the income that can be earned from the reinvestment of income received prior to maturity, call, or sale; and the time from purchase to maturity, call, or sale. Different formulas or methods are used to calculate yields. See total return analysis and yield-to-maturity.
Yield curve
A graph showing the relationship at a selected point in time between the available maturities of a security or similar securities with essentially identical credit risk and the yields that can be earned for each available maturity. A graphical depiction of the term structure of interest rates at any given point in time. Yield curves may be constructed for different instruments such asTreasury securities, AAA-rated municipal bonds, A-rated corporate bonds, etc. Even within the field of Treasury securities, yield curves are constructed from many different types of Treasury rates. When a yield curve is constructed by calculating the coupon rates necessary for the Treasury obligations of various maturities to be priced at par, it is called a par yield curve. When a yield curve is constructed using currently prevailing rates for instruments available for cash delivery, it is called the spot curve. When a yield curve is constructed using currently prevailing rates for instruments to be delivered at future dates, it is called the forward yield curve. When a yield curve is calculated using currently prevailing rates for interestbearing Treasuriy securities, it may be referred to as a coupon curve. When a yield curve is calculated using currently prevailing yields for zero coupon instruments, it is called the zero coupon curve.
Yield curve model
See term structure model.
Yield curve risk
The risk to a holder of financial instruments that a change in prevailing interest rates will not affect the prices or yields of the same instruments in exactly equal amounts for each available term. For example, an increase in prevailing interest rates might raise 3-month U.S. Treasury yields by 100 basis points while 6-month U.S. Treasury yields go up by only 85 basis points. (In this example, the change to the yield curve would be described as flattening. If, instead, the 6-month rate had risen by more than the 3-month rate, the change in the yield curve would be described as steepening.) The risk of a nonparallel shift in the yield curve. One of the four primary components of interest rate risk. Sometimes called yield curve twist risk, twist risk, or rotation risk.
Yield curve slope
Yield curves also describe the amount of difference between short-term and long-term rates. A yield curve that depicts the customary situation of long-term rates higher than short-term rates is called an upward sloping or positively sloped yield curve. A yield curve depicting the less common occurrence of short-term rates higher than long-term rates is called a downward sloping, negatively sloped, or inverted yield curve. When long-term rates are much higher than short-term rates, the yield curve is steep. When long-term rates are virtually the same as short-term rates, the yield curve is flat.
Yield curve smoothing.
See smoothing.
Yield curve twist
A phrase used to describe changes in prevailing interest rates that change the shape/slope of the yield curve. For example, a small increase in short-term rates and a large increase in lon- term rates that occur at the same time. A manifestation of yield curve risk.
Yield to call (YTC)
The annual percentage yield of a security calculated using the yield-to-maturity formula but with the assumption that the security is called on the first call date or on the first par call date.
Yield-to-maturity (YTM)
The annual percentage yield of a security calculated in a specific manner. The yield-to-maturity is the single discount rate that, when applied to all future interest and principal payments, produces a net present value equal to the purchase price of the security.
YTC
See yield to call.
YTM
See yield-to-maturity.