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The term 'Yield' in the context of debt markets refers
to the annualized percentage increase in the value of a debt instrument. The
percentage depends on the time of the instrument remaining to maturity such
that for a bond t years to maturity, yield is represented as
Y (t). For instance, a bond whose value increases by 10% p.a. is said to have
a 10% yield.
A yield curve is a relationship between the interest rate and the time
to maturity of the debt instrument denominated in a given currency. For the
issuer, an interest rate is the cost of borrowing while for the investor; the
rate represents a measure of return from investment.
The Kenya Government securities yield curve is derived from the relation between
interest rates of Treasury bills/bonds and the time to maturities of bonds of
different tenors. The interest rates for Treasury bills are the prevailing weighted
average rates for both 91-day and 182-day and 364-day papers while interest
rates for Treasury bonds are the average prevailing secondary market yields
for bonds based on years to maturity. In a developing market, the estimation
of the yield curve entails use of only a few known yields for certain maturities
while yields for other maturities are estimated by interpolation.
For the investor, a yield curve is useful for understanding conditions in the
financial markets with an aim to seeking trading opportunities, measuring expected
returns on bonds and acting as an indicator for interest rates and inflation
expectations. For issuers, the yield curve acts as a benchmark for pricing other
financial instruments in the market as well as predicting the yield/prices of
future government issuances.
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