Par Yield Curve

If there’s one thing you should know in life, it’s this: always know the par. What’s the par of the course in golf? You need to know, in order to know if you suck at golf or not. What’s the par yield curve on that bond? You need to know, so you know the yield-to-maturity you’re getting on your coupon-paying bond.

Yield curves are graphs that show the relationship between bond yields at different maturities and interest rates. The x-axis shows time, per usual in finance and economics. On the y-axis: interest rates. The yield curve usually slopes upward to the right, since longer maturity bonds have higher yields (keyword: usually).

The par yield curve is a special type of yield curve. The “par” part means that the graph is showing the yield-to-maturity, which is the estimated annual rate of return for the bond if you hold onto it until it matures.

Eh, wait a minute...that sounds like the coupon rate, which is how much a bond earns each year. Yep, that’s why it’s bonds issued “at par,” i.e. at their face value, which is when yield-to-maturity equals the coupon rate.

For investors, the par yield curve is a nice summary of yield-to-maturity on coupon-paying bonds. For graphers, it’s the starting point for other curves, like the spot and forward curves.