Yield (finance)

In finance, yield is a percentage that measures the cash returns to the owners of a security. Normally it does not include the price variations, at the difference of the total return. Yield applies to various stated rates of return on stocks (common and preferred, and convertible), fixed income (bonds, notes, bills, strips, zero coupon), and some other investment type insurance products (e.g. annuities).

The term is used in different situations to mean different things. It can be calculated as a ratio or as an internal rate of return (IRR). It may be used to state the owner's total return, or just a portion of income, or exceed the income.

Because of these differences, the yields from different uses should never be compared as if they were equal. This page is mainly a series of links to other pages with increased details.

Bonds, Notes, Bills

The nominal yield or coupon yield is the yearly total of coupons (or interest) paid divided by the Principal (Face) Value of the bond.

The current yield is those same payments divided by the bond's spot market price.

The yield to maturity is the IRR on the bond's cash flows : the purchase price, the coupons received and the principal at maturity.

The yield to call is the IRR on the bond's cash flows, assuming it is called at the first opportunity, instead of being held till maturity.

The yield of a bond is inversely related to its price today: if the price of a bond falls, its yield goes up. Conversely, if interest rates decline (the market yield declines), then the price of the bond should rise(all else being equal).

There is also TIPS also known as Treasury Inflation Protected Securities, or Inflation Linked fixed income. TIPS are sold by the US Treasury, and have a "real yield." The bond or notes face value is adjusted upwards with the CPI-U, and a real yield is applied to the adjusted principal, to let the investor always outperform the inflation rate, to protect purchasing power. To protect against inflation or erosion of purchasing power. In the event of deflation over the life of this type of fixed income, if offered by the US Treasury, the TIPS are still going to mature at the price at which they were sold (initial face), losing money on TIPS if bought at the initial auction and held to matruity is not possible even if deflation was long lasting.

Preferred Shares

Like bonds, preferred shares compensate owners with scheduled payments. The payments are usually called dividends, although they may technically be considered interest.

The dividend yield is the total yearly payments divided by the principal value of the preferred share.

The current yield is those same payments divided by the preferred share's market price.

If the preferred share has a maturity (not always) there can also be a yield to maturity and yield to call calculated, the same way as for bonds.

Common Shares

Common shares will often pay out a portion of the earnings as dividends. The dividend yield is the total dollars (Yen, etc) paid in a year divided by the spot price of the shares. Most web sites and reports are updated with the expected future year's payments, not the past year's.

The Price/Earnings ratio quoted for common shares is the inverse of what is called the earnings yield. EarningsPerShare / SharePrice.

Annuities

The life annuities purchased to fund retirement pay out a higher yield than can be obtained with other instruments, because part of the payment comes from a return of capital. $YearlyDistribution / $CostOfContract.

REITS, Royalty trust, Income Trusts

Like annuities, distribution yields from REITS, Royalty trusts, and Income trusts often include cash that exceeds the income earned: that is return of capital. $YearlyDistribution / $SharePrice.

How to Evaluate the Yield %

All financial instruments compete with each other in the market place. Yield is one part of the total return of holding a security. A higher yield allows the owner to recoup his investment sooner, and so lessens risk. But on the other hand, a high yield may have resulted from a falling market value for the security as a result of higher risk.

Yield levels vary mainly with expectations of inflation. Fears of high inflation in the future mean that investors ask for high yield today.

The maturity of the instrument is one of the elements that determines risk. The relationship between yields and the maturity of instruments of similar credit worthiness, is described by the yield curve. Long dated instruments typically have a higher yield than short dated instruments.

The yield of a debt instrument is generally linked to the credit worthiness and default probability of the issuer. The more the default risk, the higher the yield would be in most of the cases since issuers need to offer investors some compensation for the risk.

ee also

*Ecological yield
*Yield curve
*30-day yield
*7 Day SEC Yield
*Nominal yield
*Bond (finance)


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Yield — may mean:* Crop yield, a measure of the output per unit area of land under cultivation * Maximum sustainable yield, the largest long term fishery catch that can be safely taken * Rolled throughput yield, a statistical tool in Six Sigma * Yield… …   Wikipedia

  • Yield Gap — or Yield Ratio is the ratio of the dividend yield of an equity and the yield of a long term government bond. Typically equities have a higher yield (as a percentage of the market price of the equity thus reflecting the higher risk of holding an… …   Wikipedia

  • Yield — The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note. The New York Times Financial Glossary * * * ▪ I. yield yield 1 [jiːld] noun 1. [countable, uncountable] FINANCE the… …   Financial and business terms

  • yield — A measure of the annual return on an investment. Chicago Board of Trade glossary 1) The production of a piece of land; e.g., his land yielded 100 bushels per acre. 2) The return provided by an investment; for example, if the return on an… …   Financial and business terms

  • yield gap — ˈyield gap noun [countable] FINANCE the difference between the amounts of interest on two types of bonds: • The yield gap between the three month bill and the 30 year bond widened to 213 basis points from 212. * * *    Also known as yield ratio.… …   Financial and business terms

  • yield to call — ( YTC) The annual percentage yield of a security calculated using the yield to maturity formula but with the assumption that the security is called on the first call date or on the first par call date. American Banker Glossary The percentage rate …   Financial and business terms

  • yield to redemption — ˌyield to reˈdemption noun yields to redemption PLURALFORM [countable] FINANCE another name for yield to maturity * * * yield to redemption UK US noun [C] (plural yields to redemption) ► FINANCE …   Financial and business terms

  • yield — [yēld] vt. [ME yelden < OE gieldan, to pay, give, akin to Ger gelten, to be worth < IE base * ghel tō, (I) give, pay] 1. to produce; specif., a) to give or furnish as a natural process or as the result of cultivation [an orchard that… …   English World dictionary

  • yield to maturity — Finance. the rate of return on a bond expressed as a percentage that accounts for the difference between the interest earned based on current market value and that earned if the bond is held to maturity. Also called maturity yield. * * * …   Universalium

  • Yield curve — This article is about yield curves as used in finance. For the term s use in physics, see Yield curve (physics). Not to be confused with Yield curve spread – see Z spread. The US dollar yield curve as of February 9, 2005. The curve has a typical… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.