Background: Yield curve is the combination of interest rates against different maturity of bills and bonds. Weighted average interest rate of accepted bids is used to derive the yield curve. 91-day government treasury bill rate is the reference rate of the economy. Yield curve may be concave, convex or relatively flat depending on the short term and long term interest rates and amount. Interpolation and extrapolation method is used to derive the yield of a particular maturity due to lack of secondary market in Bangladesh.
Methods: Summation of all individual auction rates provides shape of the yield curve. Mathematical convention is demonstrated to formulate the price and interest rate of bill and bond. Macroeconomic development is considered to derive the yield curve rates. Amount of liquidity and need of the government and central bank specifically establish the yield rate.
Results: It will help to determine the interest rate of the economy impacting the exchange rate, CPI inflation rate and GDP growth.
Application: Yield curve rate is used for calculating deposit and lending rates of banks bearing in mind the liquidity position of the economy. It will also help to evaluate the held to maturity (HTM) and held for trade (HFT) securities of the banking and trading book of the banks.