Yield Pickup


DEFINITION of 'Yield Pickup'

The additional interest rate an investor receives when selling a lower-yielding bond in exchange for a higher-yielding bond. The bond with the lower yield generally has a shorter maturity, while the bond with the higher yield will typically have a longer maturity. A certain amount of risk is involved since the bond with a higher yield is often of a lower credit quality. Additionally, the investor can be exposed to interest rate risk with the longer maturity bond.

BREAKING DOWN 'Yield Pickup'

For example, an investor owns a bond issued by Company ABC that has a 4% yield. The investor can sell this bond in exchange for a bond issued by Company XYZ that has a yield of 6%. The investor's yield pickup is 2% (6% - 4% = 2%). Bonds that have a higher default risk often have higher yields, making a yield pickup play risky. Ideally, a yield pickup would involve bonds that have the same rating or credit risk, though this is not always the case.

  1. Yield To Maturity (YTM)

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  2. Junk Bond

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  4. Yield

    The income return on an investment. This refers to the interest ...
  5. Default Risk

    The event in which companies or individuals will be unable to ...
  6. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
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