Bases of Financial Management

Résumé du document

To understand the principal of the Yield curve we have first to define his terms and how it works. "Yield" is comparative as the interest rates: a percentage, during a defined period, of the profitability from a financial product for the person, who is lending it to another, schematically. Curve, in his side, is a graphical representation.

The "Yield curve" is in fact the graphical representation of the relation between these interest rates and the maturity of the financial product: the time needed to go to the terms of him. The operation of the yield curve is related to the time of maturity, first of all. It shows the evolution of the different yields on bonds across the time and permits to compare the different stage of maturity on bonds: if they are more profitable on short, medium or long term.

It is a huge tool for the investors, to know what is the most interesting placement related to their capacity from investment: how are they able to lend and have they the capacity to wait a long time before obtain revenue or not. It will permit to compare then the different yield curves of bonds and to know, which is the most profitable for them.

Extraits

[...] Now if the ratio of the sector is more than 20, it could mean that: - The title is undervalued and there is a possibility of equilibration - The previsions are more decreasing and the uncertainty on the value have the risk to generate the pursue of the fall of the price. This analyze seems to show us that we have to be really carefully with the interpretation of this ratio. Moreover there are several bad elements, which are important to be known. The first one is that it is impossible to know if we have to buy or sell shares with the help of this ratio. This decision has to be more learned with other study. [...]

[...] By the way if this point is increasing, then the investors are worried about the net return of tax and have then to be compensated. Like for the first factor, the yield curve of the bond will then increase more than before. The last factor now is the information costs. If the investors have to spend more money to obtain information and be able to evaluate the quality of one credit, then they have to obtain compensation and that is the reason why the yield curve will increase. These four points are called the “risk structure of interest rates”. [...]

[...] As a treasurer I would do this recommendation if the situation of the market will stable and that the company is not in difficulties. It seems more interesting to invest than to let money sleep if it did not permit to generate money with important interest rate. It is a situation by the way, were the yield curve is really important. It seems then primordial for a treasurer to know how this last one is efficient and to be able to analyze it. One other point of this influence from the capital markets is the value of the money. [...]

[...] If we were trying to traduce the mathematical formula with our own words I would say that this indicator allows showing the number of years that an investor needs to spend to acquire a financial title. It permits to compare the prices level of one share compared to the other shares of the same sector. It can be at the CAC 40 by example. In the concrete term, this ratio permits to understand how the investors have understood the evolution of one company: if they are thinking that it will be up or down. The interpretation of the P/E ratio can be double. [...]

[...] The answer is quite simple by the way. They are several factors, more than only the time of expiration, which are the key of the explanation from differences between curves from different bonds. The first one is the “credit risk”. If it his increasing, then the investors have to be compensated because of the increasing of this additional risk too. It has the effect of an increasing from the yield curve. One other factor of the evolution of the yield curve is the liquidity. [...]