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
nominal yieldor coupon yield is the yearly total of coupons (or interest) paid divided by the Principal (Face) Value of the bond.
current yieldis those same payments divided by the bond's spot market price.
yield to maturityis 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 sharescompensate 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.
current yieldis 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 maturityand yield to call calculated, the same way as for bonds.
Common shares will often pay out a portion of the earnings as dividends. The
dividend yieldis 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.
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 yieldmay 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.
7 Day SEC Yield
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Look at other dictionaries:
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 — 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 curve slope — Yield curves also describe the amount of difference between short term and long term rates. A yield curve that depicts the customary situation of long term rates higher than short term rates is called an upward sloping or positively sloped yield… … Financial and business terms
yield-to-maturity — ( YTM) The annual percentage yield of a security calculated in a specific manner. The yield to maturity is the single discount rate that, when applied to all future interest and principal payments, produces a net present value equal to the… … Financial and business terms
yield to maturity — The rate of return an investor receives if a fixed income security is held to maturity. Chicago Board of Trade glossary The percentage rate of return paid on a bond, note, or other fixed income security ( fixed income securities) if the investor… … Financial and business terms