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Normal Yield Curve

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The normal yield curve is a yield curve with interest rates gradually rising as the term increases. The shape of the normal yield curve can be understood in terms of risk. The normal yield curve is a consequence of higher interest rates to compensate for the greater risk associated with the increased uncertainty. Historically, the market has had a normal yield curve most of the time. If short-long spread becomes sufficiently wide, the market is said to have a steep yield curve rather than a normal yield curve. The normal yield curve can also turn into a flat yield curve if the spread narrows, or possibly an inverted yield curve, if the spread reverses. With a normal yield curve, banks make a reasonable profit by paying less on short-term deposits than they make on long-term loans. A normal yield curve is considered healthy for not only for the financial sector but also the economy.



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