Relationship Between Interest Rates & Yields


In finance, “yield” refers to the profits of an investment. With investments that make money from earning interest, the interest rate determines how high the yield will be. Investors compare the yields of different bonds using a “yield curve."


Investors talk about yields or the rates of return from all kinds of investments, though yields and interest rates are only directly connected to fixed-rate investments such as bonds and certificates of deposits. For example, if you bought a share for $50 and sold it for $75, your yield would be $25 or 50 percent. A lot of the descriptive phrases use the word as well: “high yield” means a very profitable investment, and “expected yield” refers to forecast earnings.

Interest Rates

When people lend money, they risk not getting it back and they give up the ability to spend that money whenever they want. Thus, in return for lending, people expect to receive a little extra when the borrower returns the loan. How much extra the lender gets depends on the interest rate attached to the loan.

Fixed-Rate Investments

Fixed-rate investments generate money through an interest rate, for example, a 10-year bond that pays 3 percent. They are more stable and generally more secure than other investments that generate money based on someone else’s profit. For fixed-rate investments, the interest rate determines the yield. For example, you know you will have a 3 percent yield on that bond as long as the issuer doesn’t go bankrupt.

Yield Curve

Investors compare bonds using a yield curve, which compares the interest rates on bonds with different maturity dates. For example, U.S. Treasury notes range from one month to 30 years. Usually, long-term bonds offer higher interest rates and thus a higher yield than short-term bonds because they involve a greater risk, causing the line tracking yields to curve upward, giving the “yield curve” its name.

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