Interpolated Yield Curve (I Curve)

An interpolated yield curve (I curve) is a graphical representation of the interest rates that a bond issuer would pay over time for a given set of bond yields. The I curve is created by taking the yields of several different bonds with different maturities and plotting them on a graph. The resulting curve shows how the interest rate changes as the maturity of the bond changes.

The I curve is a useful tool for investors because it can help them to understand the relationship between interest rates and bond prices. By understanding this relationship, investors can make more informed decisions about when to buy and sell bonds.

The I curve can also be used to forecast future interest rates. By looking at the current shape of the I curve, investors can make an educated guess about how interest rates are likely to change in the future. This information can be used to make investment decisions, such as when to lock in a fixed-rate mortgage.

There are a few different ways to create an I curve. One common method is to use the linear interpolation method. This method involves taking the yields of two different bonds with different maturities and drawing a straight line between them. The yield at any given point on the line is the interpolated yield.

Another method for creating an I curve is to use the log-linear interpolation method. This method involves taking the natural logarithms of the yields of two different bonds with different maturities and drawing a straight line between them. The yield at any given point on the line is the interpolated yield.

The I curve is a valuable tool for investors, but it is important to remember that it is only a tool. The I curve does not predict future interest rates with certainty. It is simply a way of visualizing the relationship between interest rates and bond prices.