Occasionally, when lenders are seeking long-term debt contracts more aggressively than short-term debt contracts, the yield curve "inverts", with interest rates (yields) being lower for the longer periods of repayment so that lenders can attract long-term borrowing.The yield of a debt instrument is the overall rate of return available on the investment.In finance, the yield curve is a curve showing several yields or interest rates across different contract lengths (2 month, 2 year, 20 year, etc...) for a similar debt contract. The shape of the yield curve indicates the cumulative priorities of all lenders relative to a particular borrower, (such as the US Treasury or the Treasury of Japan) or the priorities of a single lender relative to all possible borrowers.The curve shows the relation between the (level of) interest rate (or cost of borrowing) and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. With other factors held equal, lenders will prefer to have funds at their disposal, rather than at the disposal of a third party.In general the percentage per year that can be earned is dependent on the length of time that the money is invested.For example, a bank may offer a "savings rate" higher than the normal checking account rate if the customer is prepared to leave money untouched for five years.
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In addition, lenders may be concerned about future circumstances, e.g.
a potential default (or rising rates of inflation), so they demand higher interest rates on long-term loans than they demand on shorter-term loans to compensate for the increased risk.
The interest rate is the "price" paid to convince them to lend.
As the term of the loan increases, lenders demand an increase in the interest received.
Investing for a period of time t gives a yield Y(t).