Current Yield
What Is Credit Yield?
Credit yield refers to the return investors earn from debt securities that carry credit risk, such as corporate bonds or other non-government bonds. It reflects the interest investors receive as compensation for lending money to borrowers that may have a higher risk of default.
Credit yield is often higher than the yield on government bonds.
Why It Matters
Investors use credit yield to evaluate the potential return from bonds issued by corporations or other entities. Because these issuers carry varying levels of financial risk, investors expect higher yields to compensate for the possibility of default.
Credit yield also helps investors compare risk across different bond investments.
How Credit Yield Works
Credit yield depends on several factors:
- the issuer’s credit rating
- prevailing interest rates
- market demand for the bond
- the bond’s maturity date
Higher-risk borrowers typically offer higher yields to attract investors.
Credit rating agencies help investors assess the risk associated with different bonds.
Example
A government bond may yield 3%, while a corporate bond from a riskier company may offer a 6% credit yield.
Credit Yield vs Treasury Yield
- Credit yield reflects returns from bonds issued by corporations or other entities.
- Treasury yield reflects returns from bonds issued by the U.S. government.
FAQs About Credit Yield
Why are credit yields higher than Treasury yields?
Investors require extra return for taking on additional credit risk.
What affects credit yields?
Credit ratings, economic conditions, and market demand influence them.
Are higher credit yields always better?
Not necessarily. Higher yields may signal greater risk.
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