Bank of England Essay Example | Topics and Well Written Essays - 1250 words

Bank of England - Essay Example This paper highlights that it the time of the financial crisis, banks tend to raise the interest rate to discourage investors from borrowing money that is due to depositors. Yield curves are used to predict the changes in economic output and its overall growth. The line plots the interest rates at a given point in time of bonds having similar credit quality but differing in their maturity period. As the paper outlines the shape arising from the yield curve is significant to the investors as it helps give an idea of what the future interest rates change and the change of the economic environment of the country. Yield curves are of three types; Under this type of curve bonds with a shorter-term maturity period will normally yield higher than bonds with longer-term maturity period, which will tend to have lesser returns, this can be a sign of the upcoming recession. When the yield curve is flat, it means that shorter- and longer-term yields are relatively close to each other in terms of their yield; this can be a prediction of an economic transition. The gradient of a yield curve is a significant factor to investors; the bigger the gradient of the yield curve, the bigger the difference between short- and long-term rates of return to investment.The UK government is prudent to note the liability of the economy. The liability nominal yield curves are retrieved from UK gilt prices a nd General Collateral (GC) rates and the UK index-linked bond prices. Gilt-edged securities are Foreseeable and guaranteed for a future pay by the Government to the holder of the gilt. The payment is made in a fixed cash payment (coupon) semi-annually until the maturity date. At maturity, the holder receives the final coupon payment and the principal. Index-linked gilt is intended to: