Yield (finance)
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In financial economics, the yield of a financial instrument/security (finance), usually a debt instrument, or other investment is the rate of return the holder earns on that instrument.
The absolute yield levels vary mainly with expectations of inflation. How yields compare between financial instruments tends to depend mainly on the credit worthiness of the lender, and the maturity of the instrument. The least risky instruments, such as government bonds, virtually always yield less than more risky corporate bonds. The relationship between yields and the maturity of instruments of similar credit worthiness, is described by the yield curve. Long dated instruments typically have a higher yield than short dated instruments.
The yield of a debt instrument is generally linked to default probability of the issuer. The more the default risk, the higher the yield would be in most of the cases since issuers need to offer investors some compensation for the risk.
In bond markets, US Treasury bond yields are the benchmark debt instruments because they are backed by the US Government and the risk of default is almost nil. All the other debt instruments' yields are then linked to their default risk.
Inflation is linked to the yield in the sense that fears of high inflation in the future would mean that investors would ask for high yield today.
