Final answer:
A normal yield curve is upward sloping, reflecting that bonds with longer maturities typically offer higher yields to compensate for the increased risk and longer investment period. The shape can change depending on the maturity range represented on the graph. Treasury and AAA-rated corporate bonds tend to fluctuate together, albeit corporate bonds offer higher yields due to their higher risk.
Step-by-step explanation:
A "normal" yield curve is a graph that plots the interest rates of bonds with identical credit quality but differing maturity dates. Typically, the curve is upward sloping, indicating that longer-term debt instruments have a higher yield compared to those with shorter maturities. This shape reflects the higher risk and the longer period during which investors are separated from their money. As the term increases, rates generally go up in a normal yield curve scenario.
In financial studies, plotting bond yields is essential, and these can vary depending upon the type of bond. For instance, the yield on 10-year Treasury bonds, known as notes, and AAA-rated corporate bonds. The shape of the graph can be described by drawing a smooth curve through the tops of the bars representing different maturity dates. The typical yield curve has an initial upward slope (concave upwards), flattens out in the middle (a straight line with slope zero), and may rise again for longer maturities (concave downwards). Changing the number of bars, representing different maturities, can change the shape of the curve. If more short term rates were introduced, or if the long-term rates were extended, the shape could show more curvature or additional inflection points. The context of the data, such as Figure 17.5 showing bond yields for both Treasury and AAA-rated corporate bonds, may exhibit similar patterns due to the shared risk assessment, despite corporate bonds paying higher interest rates due to inherently greater risk compared to government bonds.