Yield instruments compete against other financial products in the open market. Investors have to weight the risk associated with owning one particular security over another. This is where the returns are weighed.
When the yield is higher, this allows the investor to recoup the money invested sooner, thus reduce the risk.
Yield in debt instruments tend to be related to credit rating. Companies that have a lower rating have to pay a higher return to entice investors to get involved. This is to offset the potential for default on the payment of principal and interest.
The flip side of this is risk-free yield which is provided by the 10-year U.S. Treasury. All fixed income investments are weighed against this metric.
The yield on a fixed income security is inversely related to interest rates. If rates rise, for example due to inflation or a change in the economy, the price of a bond or note falls, driving its yield higher to maintain parity with the market. The reverse also occurs. If market rates decline, then the price of the bond should increase, driving its yield lower.
Typically, the yield on the 10-year Treasury bond will be higher than short-term securities. Time in considered an important variable as it brings greater uncertainty. Longer term assets have more price volatility as a result.
See also: Yield Curve