Yield facts for kids
Imagine you put your money into a special savings account or lend it to a company or government. The yield is like the yearly payment you get back for letting them use your money. It's how much extra money you earn on your investment each year.
Unlike a dividend from a company, which can change depending on how well the company is doing, a yield is usually more predictable. This means you often know how much money you will make from your investment ahead of time, unless the company or government you invested in runs into serious financial trouble, like a bankruptcy.
Understanding Yields
Yields can be different for many reasons, including how much inflation there is. Inflation means that money can buy less over time, so a yield might not feel like as much if prices are going up quickly.
Risk and Return
There's usually a clear order for how risky different investments are and how much yield they offer. Generally, the less risky an investment is, the lower its yield will be. This is because people are willing to accept a smaller return for the safety of knowing their money is secure.
- Least Risky: Investments like Treasury bonds, which are loans to the government, are usually considered very safe. They offer the lowest yields because the chance of the government not paying you back is very small.
- Safe and Guaranteed: Next are things like long-term deposits at a bank. These are also quite safe and offer a bit more yield than government bonds.
- Short-Term Deposits: Overnight deposits, where you can take your money out very quickly, might offer slightly different yields.
- More Risky: Then come various municipal bonds (loans to local governments) and corporate bonds (loans to companies). These have higher yields because there's a slightly higher chance that the local government or company might not be able to pay you back.
- Extremely Risky: Investments with very high yields are often called junk bonds. These are loans to companies or governments that are not very stable, so there's a much higher risk that you might not get your money back. Because of this high risk, they offer a much larger yield to attract investors.
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