The Role of Yield Curves in Increasing the Efficiency of Assets

by Will Gish

Accountants, business managers and financial analysts measure the value of assets and investments in myriad ways. This analysis provides a means of understanding the value and capital efficiency of investments. Yield curves provide one such method of measuring the value of assets — particularly intangible financial assets. Developing or tracking yield curves may help improve the efficiency of certain intangible financial assets with regard to optimizing capital investments.

Yield Curves

Yield curves constitute graphic representations of the relationship between the yield of an investment and the length of its maturity. For example, if a bond matures after 30 years, the yield curve on the bond shows interest percentage rates at various points in the life of the bond. Because interest rates usually increase in direct relation to the length of a security’s maturity, normal yield curves slope upward and abnormal yield curves slope downward. The U.S. Treasury regularly publishes yield curves for all of its securities.

Intangible Financial Assets

Intangible assets constitute all things of value without physical form. This includes trademarks, franchise rights, patents, goodwill and certain financial assets. Intangible financial assets include stocks, bonds, notes and all other securities and commodities. Companies purchase intangible financial assets for a certain value and sell them for a certain value, but never obtain physical property in exchange for the purchase. This qualifies these assets as intangible. Companies or individuals earning capital from investments earn money from intangible assets.

Financial Efficiency

Financial efficiency arises from the relationship between expenditure and profit. Maximum profits earned at minimum expenditure results in optimal financial efficiency. For example, in retail, a product that costs $2 to produce and sells for $100 exhibits extreme efficiency. Investment efficiency occurs when an individual or company invests only in assets with a positive net present value (NPV). NPV measures the actual value of an investment by subtracting all costs associated with the investment from its return value.

Increasing Efficiency with Yield Curves

Analysis of yield curves can increase the financial efficiency of intangible assets. Financial analysts compare the costs associated with investing in a bond or note with the expected earnings based on a yield curve. Such analysis reveals not only whether an investment yields a positive NPV, but which investments with a positive NPV yield the highest percentage of profits. Investing only in bonds and notes with the highest positive NPV at the optimal costs increases the efficiency of intangible assets.

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