The yield gap or yield ratio is the ratio of the
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 ...
of an equity and the
yield of a long-term
government bond
A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity dat ...
. 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.
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.
See also
Yield (finance)
In finance, the yield on a security is a measure of the ex-ante return 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 t ...
References
Financial ratios
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