Final answer:
The rate of return for bondholders is referred to as the bond yield, which encompasses compensation for delaying consumption, adjustment for inflation, and a risk premium based on the borrower's creditworthiness.
Step-by-step explanation:
The rate of return earned by bondholders is called the bond yield. This return on investment includes three components:
- Compensation for delaying consumption.
- An adjustment for an inflationary rise in overall price levels, preserving the bond's purchasing power.
- A risk premium reflective of the borrower's creditworthiness.
Bonds are promised payments based on the interest rate at issuance and the repayment upon maturity. High-yield bonds, also known as junk bonds, offer potentially higher returns due to higher risk of default. Bond investments can also be risky if market interest rates rise, decreasing the value of lower-rate bonds. The bond yield represents total returns, consisting of interest payments and capital gains or losses.