What is ‘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.
Explaining ‘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.
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