What do yield curves represent?

Yield curves represent the relationship between interest rates and the time to maturity of debt securities. They illustrate how the yield, or return, on bonds changes with varying lengths of time until maturity. Typically, a yield curve is upward sloping, indicating that longer-term debt instruments yield higher returns than shorter-term ones. This reflects the increased risk and uncertainty over time, as well as the opportunity cost of tying up capital for longer periods.

Understanding this relationship is crucial for investors and financial analysts as it provides insights into future interest rate expectations, economic growth, and inflation. Yield curves can take different shapes (normal, inverted, flat), and each form carries implications for economic conditions. This makes it a fundamental tool in fixed-income investing and broader economic forecasting.

The other options do not accurately describe the purpose of yield curves. For instance, yield curves are not focused on stock prices or average returns across all financial instruments, nor do they provide insights about the historical performance of different asset classes.