Yield Gap or Yield Ratio is the ratio of the
dividend yieldof 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 equity. [ [http://glossary.reuters.com/index.php/Yield_Gap Yield Gap] ; Reuter's Financial Glossary] [ [http://moneyterms.co.uk/yield-gap/ Yield Gap] ; Moneyterms]
The purpose of calculating the yield gap is to assess whether the equity is over or under priced as compared to bonds. For a given equity, the following cases may be considered:
* If the yield gap is numerically small, then equity yield is lower than bond yield implying that the equity is overpriced.
* If the yield gap is numerically large, then equity yield is higher than bond yield implying that the equity is cheap.
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