Before moving to the case, it is more significant that one should have idea of yield curve parallel and non-parallel shifts. Yield curve take on various shapes which has been historically observed from through various maturities treasury instrument. To be very precise, yield curve undergoes two types of shifts such as parallel shifts and non-parallel shifts. Following are the suitable explanation for both aforementioned shifts which are taken up by yield curve as follows: Parallel Shifts Figure 1: Under parallel shifts, yield curve goes under any of three directions mentioned above and rates for all maturities (interest rates) change by same amount and in same direction. Normal: When yield curve undergoes normal shift, then long term rates are more than short term rates which depict that the interest rate environment is going to be broaden. Under such scenario, interest rates (Discount Rates) for long maturity tend to be higher and in such case, bonds with shorter maturities tend to outperform the long maturity bonds in general circumstances. Flat: Under flat term structure, yield is same on almost all maturities and there is very little evidence of outperforming or underperforming either by shorter or longer maturity bond. Inverted: Under such scenario, long term rates are less than short term rates which depict that the interest rate environment is going to be narrower. Under such scenario, interest rates (Discount Rates) for long maturity tend to be lower and in such case, bonds with shorter maturities tend to underperform the long maturity bonds in general circumstances. Important Point: When the yield curve undergoes parallel shift, then yields on all maturities change in the same direction and by the same amount. Non-parallel Shifts Under non-parallel shifts, yield curve takes shape such that yields on all maturities change by different amounts. The yield curve would not remain the same as it was before the shift of the curve....
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