Bond yields do not exist in a bubble. If they did, you would have to consider only the yield of a bond to determine if it were a good buy or not. Any bond with a higher yield, or interest payment, would be a better deal than one with a lower yield. However, bond yields are always subject to other factors when you are estimating whether the bond is a good investment or not. Those factors include price, maturity and risk.

Comparing Bond Yields Based on Price

The comparison between the average yield of a bond and the average price of the bond is called duration. Duration accounts for this typical scenario: when the yield of a bond goes up, its price tends to go up as well. In order to get a higher yield bond, the investor must pay more than investors who purchased the bond previously at a lower yield. Duration expresses this change in a simple number. By calculating the duration of a bond over time, you can estimate how stable the bond is. If the duration changes frequently, then it is a sign the bond's value goes up and down, and the bond is less stable than one with a constant duration.

Comparing Bond Yields Based on Maturity

The longer you hold a bond, the greater effect inflation will have. For example, if you hold a simple Treasury bond for 5 years, the rate of inflation may be fairly low or stable. This means you could invest in a bond with a moderate yield and still earn more than if you invested the same money in a CD or even a savings account. This is not true if the value of the dollar changes dramatically during the time you hold the bond. This is typically the case with a 30-year Treasury bond. If you buy a $100 30-year bond today and earn back $125 in 30 years, you probably would have done better just using a CD or savings account. If the yield of that bond is very high in the meantime, though, the exposure to losses from inflation may be less of a factor.

Comparing Bond Yields Based on Risk

Bond yields are set to be higher on riskier bonds. For example, Treasury bonds are generally the safest investment on the bond market because there is no risk of total default. They have low yields because the Treasury does not have to compete with corporate bonds. Corporate bonds, though, have to compete with each other. Bond yields are a common way to compete. The safer corporate bonds, those with an A rating or higher from Standard & Poor's or Moody's, will tend to have lower yields. Bonds between BBB- and A-, however, need to set very competitive yields to entice investors to take the risk. Knowing the rating of a bond before taking a look at the yield is key to understanding why the yield may be set higher or lower than on a comparable corporate bond.

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