Higher Bond Yield Always Better!?--> May 9, 2021

Higher Bond Yield Always Better?

All things equal, a higher yield on a bond should be preferable to a lower yield. However, all things are rarely equal! A higher yield on a bond is usually offered to compensate investors for higher risk undertaken. For example, a lower quality company will have to offer investors a superior coupon rate vis-à-vis a company with better fundamentals to compensate for the higher risk of default.

Even for bonds of the same company, yields on different issues can differ if their maturity dates are different, if there are differences in their capital hierarchy (senior versus junior), or if there are embedded options. In general, longer maturity bonds will offer a higher yield compared to shorter maturity ones, given that there is more interest rate risk inherent in the former. While yields are a good starting point when looking for a suitable bond to buy, it is also important to know about the various differences between bond issues and not base your investment decisions solely on yield alone.

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