What is a yield? It is a percentage. It is a relative measure. What do financiers see or think when they see bond yields? They compare those with others. What's the meaning of a 5% coupon? A 5% return on investment? And why don't bonds pay, say 100% during normal times? What kind of world would it have to be for that to be a regular occurrence? The borrower when a business is more often than not borrowing to finance a line of business (or re-financing a previously financed line of business). If they decided to borrow on those terms, then for the line of business to make a profit, then the expected annual profitability needs to be somewhere north of 100%. Businesses simply don't mature that rapidly, nor do they remain so profitably too long before competitors arrive in to bring down average profitability for the sector participants. So capitalism itself, and the natural difficulty business managers have in finding investible lines of business mean that seeking funding in the first place would not be worth it if the lender expects 100% return or anywhere near that.
Yields on bonds are nominal, in the sense of being unadjusted for inflation. Loans promise to pay back a future fixed cash sum. An intervening period of high inflation, for example, will erode the real value of the cash flows, including the final payment.
So I ask again, what is a bond yield? It is made up of a risk free part, a part shared by the population of peer bonds, and a more firm specific part, which measures the market's judgement on how risky this firm (or sector) is. A macro-economic context and a firm-specific context. You get, say, 7% for this bond because the prevailing economic climate dictates that even the least risky lender gets, say, 4% and you receive an additional 3% because of the market's judgement on how confident it feels that the firm will honour its debt obligations. In the jargon of finance, the yield has a risk free component and a credit component.
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