Explain the yield curve and how it reacts to changes in interest rates.

The yield curve for the bonds in relation to the interest rates relies heavily on the
relationship that exist between increase and decrease of the rates of interest and bond prices on
the stock market. In a normal way, the yield curve is expected to be positive on the bonds. It
should be understood that, the bond prices and the interest rates experience an inverse
relationship whereby the increase in interest rates on bonds results to a decrease in bond prices.
The change in interest rates would in that respect lead to a shift in the yield curve, which
indicates a risk. The risk as a result of the above is referred to as yield curve risk. The risk in that
regard is directed to the investor in question. The general understanding on duration for bonds is
that short- term bonds have lower yield as compared to long- term bonds. The curve for
representation of the above scenario therefore curves and sloped upwards from the bottom left
side to the right side. In this case, the curve would be normal or otherwise called positive yield
curve.