Definition of Flat Yield Curve

A "flat yield curve" is the graphical representation of a situation in which there is little or no difference between the long-term and short-term interest rates for bonds of a given quality. Typically, yields will be lower for bonds with a relatively short time to maturity than for bonds of the same credit class with a longer time to maturity. This is because the investor assumes more risk if he or she must wait longer for the bond to mature, and it is represented by an upward sloping yield curve. In a situation characterized by a flat yield curve, there is little or no incentive for investors to hold a longer-term bond, since they will not enjoy an appreciably higher rate of return than they would if they were holding a lower-risk short-term bond.