Two bonds mature in five years: a gilt yielding 4.2% and a bond issued by a small, highly indebted company yielding 9.5%. Why is the company bond's yield so much higher?
The extra yield over a gilt of the same maturity, the credit spread, compensates investors for the risk that the issuer will fail to pay interest or capital. The UK government is treated as having minimal default risk on sterling gilts. Gilts are among the most liquid bonds, corporate bonds are not generally tax-free, and the FSCS does not protect bondholders against the issuer's default (COMP).
Thinking a higher yield signals a better investment rather than more risk.
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