In
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
, the yield on a
security
Security is protection from, or resilience against, potential harm (or other unwanted coercive change) caused by others, by restraining the freedom of others to act. Beneficiaries (technically referents) of security may be of persons and social ...
is a measure of the
ex-ante return
Return may refer to:
In business, economics, and finance
* Return on investment (ROI), the financial gain after an expense.
* Rate of return, the financial term for the profit or loss derived from an investment
* Tax return, a blank document or t ...
to a holder of the security. It is one component of return on an investment, the other component being the change in the market price of the security. It is a measure applied to
fixed income securities,
common stocks
Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Comm ...
,
preferred stocks,
convertible stocks and bonds,
annuities
In investment, an annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities are regular deposits to a savings account, m ...
and real estate investments.
There are various types of yield, and the method of calculation depends on the particular type of yield and the type of security. Because of these differences, yield comparisons between different types of financial products should be treated with caution.
Fixed income securities
The
coupon rate
In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product.
Customarily, coupons are issued by manufacturers of consumer packaged goods
or by retailers, to be used in r ...
(or nominal rate) on a
fixed income security
Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ...
is the interest that the issuer agrees to pay to the security holder each year, expressed as a percentage of the security's principal amount (
par value
Par value, in finance and accounting, means stated value or face value. From this come the expressions at par (at the par value), over par (over par value) and under par (under par value).
Bonds
A bond selling at par is priced at 100% of face valu ...
).
The
current yield
The current yield, interest yield, income yield, flat yield, market yield, mark to market yield or running yield is a financial term used in reference to bonds and other fixed-interest securities such as gilts. It is the ratio of the annual int ...
is the ratio of the annual interest (coupon) payment and the bond's market price.
The
yield to maturity
The yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, h ...
is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, holds it to
maturity, and receives all interest payments and the payment of par value on schedule. Unlike current yield, it takes into account the payment of principal to the bondholder when the bond matures.
For bonds with embedded
call
Call or Calls may refer to:
Arts, entertainment, and media Games
* Call, a type of betting in poker
* Call, in the game of contract bridge, a bid, pass, double, or redouble in the bidding stage
Music and dance
* Call (band), from Lahore, Paki ...
or
put options:
* yield to call uses the same methodology as the yield to maturity, but assumes that the issuer
calls the bond at the first opportunity instead of allowing it to be held until maturity;
* yield to put assumes that the bondholder sells the bond back to the issuer at the first opportunity; and
* yield to worst is the lowest of the yield to all possible call dates, yield to all possible put dates and yield to maturity.
Par yield assumes that the security's market price is equal to par value (also known as
face value or nominal value). It is the metric used in the
U.S. Treasury's daily official "Treasury Par
Yield Curve
In finance, the yield curve is a graph which depicts how the yields on debt instruments - such as bonds - vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or ye ...
Rates".
Preferred shares
The dividend rate is the total amount of dividends paid in a year, divided by the principal value of the preferred share. The
current yield
The current yield, interest yield, income yield, flat yield, market yield, mark to market yield or running yield is a financial term used in reference to bonds and other fixed-interest securities such as gilts. It is the ratio of the annual int ...
is those same payments divided by the preferred share's market price. If the preferred share has a maturity or call provision (which is not always the case),
yield to maturity
The yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, h ...
and yield to call can be calculated.
Common shares
The current
dividend yield
The dividend yield or dividend–price ratio of a share is the dividend per share, divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant ...
is the annualized cash dividend (in dollars, RMB, Yen, etc.) divided by the current market price of one share. Most web sites and reports are updated with the expected future year's payments, not the past year's.
REITs, royalty trusts, income trusts, annuities
Distribution yields from
REITs,
royalty trust
A royalty trust is a type of corporation, mostly in the United States or Canada, usually involved in petroleum, oil and gas production or mining. However, unlike most corporations, its profits are not taxed at the corporate level provided a certai ...
s,
income trust
An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. They are especially useful for financial requirements of institutional investors such as pension funds, and for investors such as retir ...
s and
annuities
In investment, an annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities are regular deposits to a savings account, m ...
often include
return of capital
Return of capital (ROC) refers to principal payments back to "capital owners" (shareholders, partners, unitholders) that exceed the growth (net income/taxable income) of a business or investment. It should not be confused with Rate of Return (ROR ...
, cash that exceeds the income earned.
Real estate and property
Several different yields are used as measures of a real estate investment, including initial, equivalent and reversionary yields.
Initial yield is the annualised rents of a property expressed as a percentage of the property value.
E.g.
£100,000 passing rent per annum
£1,850,000 valuation
100000/1850000 = 0.054 or 5.4%
Reversionary yield is the anticipated yield to which the initial yield will rise (or fall) once the rent reaches the ERV.
E.g.
£150,000 ERV per annum
£1,850,000 valuation
150000/1850000 = 0.081 or 8.1%
Equivalent yield lies somewhere in between the initial yield and reversionary yield, it encapsulates the
DCF of the property with rents rising (or falling) from the current annualised rent to the underlying estimated rental value (ERV) less costs that are incurred along the way. The discount rate used to calculate the net present value (NPV) of the
DCF to equal zero is the equivalent yield, or the
IRR.
The calculation not only takes into account all costs, but other assumptions including rent reviews and void periods. A trial and error method can be used to identify the equivalent yield of a
DCF, or if using Excel, the goal seek function can be used.
Factors affecting the yield
All financial instruments compete with each other in the financial markets. Investor perceptions of risk influence the yield they require to justify investment in a particular security. Higher yields allow owners to recoup their investments sooner, and so lessen risk. All other things being equal, the weaker the credit rating of the issuer, the higher the yield must be. This reflects the tendency for investors to require compensation for the additional risk that the issuer may default on its obligations to pay interest and repay the principal at par value.
Yield levels vary with expectations of
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
and the general outlook for the economy (the
business cycle
Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...
). Fears of high inflation in the future mean that investors ask for a higher yield today to protect their purchasing power.
The yield on a fixed income security is inversely related to financial market interest rates. If market 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 market rates. Conversely, if market rates decline, then the price of the bond should increase, driving its yield lower, all else being equal.
Under normal market conditions, long-term fixed income securities (for example, a 10-year bond) have higher yields than short-term securities (e.g., a 2-year bond). This reflects the fact that long-term securities are more exposed to the uncertainties of what could happen in the future—especially changes in market rates of interest. Therefore, longer maturity securities have more potential price volatility. The relationship between yield and maturity is described by the
yield curve
In finance, the yield curve is a graph which depicts how the yields on debt instruments - such as bonds - vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or ye ...
.
Special cases
Coupon payments from
floating rate bonds and notes and
Treasury Inflation Protected Securities are reset periodically based on a specified benchmark. It is not possible to accurately calculate the future stream of coupon payments from these securities, so yield to maturity and internal rates of return cannot be calculated. Other metrics must be used.
See also
*
Ecological yield
Ecological yield is the harvestable population growth of an ecosystem. It is most commonly measured in forestry: sustainable forestry is defined as that which does not harvest more wood in a year than has grown in that year, within a given patch o ...
*
Yield curve
In finance, the yield curve is a graph which depicts how the yields on debt instruments - such as bonds - vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or ye ...
*
30-day yield
*
7-day SEC yield The 7-day SEC Yield is a measure of performance in the interest rates of money market mutual funds offered by US mutual fund companies. It is also referred to as the 7-day Annualized Yield.
The calculation is performed as follows:
:Take the net i ...
*
Nominal yield The coupon rate (nominal rate, or nominal yield) of a fixed income security
Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borr ...
*
Bond (finance)
In finance, a bond is a type of security under which the issuer ( debtor) owes the holder ( creditor) a debt, and is obliged – depending on the terms – to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well a ...
*
Roll yield The roll yield is the difference between the profit or loss of a futures contract and the change in the spot price of the underlying asset of that futures contract. Unlike fixed income or dividend yields, a roll yield does not provide a cash payme ...
References
{{DEFAULTSORT:Yield (Finance)
Valuation (finance)
Yield (finance)
Financial economics