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In
finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corn ...

finance
, the yield on a
security Security is freedom from, or resilience against, potential Potential generally refers to a currently unrealized ability. The term is used in a wide variety of fields, from physics Physics is the natural science that studies matter, its El ...
is a measure of the
ex-ante The term ''ex-ante'' (sometimes written ''ex ante'' or ''exante'') is a phrase meaning "before the event". Ex-ante or notional demand refers to the desire for goods and services which is not backed by the ability to pay for those goods and services ...
return to a holder of the security. It is measure applied to common stocks, preferred stocks, convertible stocks and bonds,
fixed income Fixed income refers to any type of investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance ...
instruments, including bonds, including
government bonds A government bond or sovereign bond is an debt obligation issued by a national government to support government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national ...

government bonds
and
corporate bond A corporate bond is a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with ...
s, notes and
annuities 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, monthly home mortga ...
. There are various types of yield, and the method of calculation depends on the particular type of yield and the type of security.
Dividend yield The dividend yield or dividend–price ratio of a share is the dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing t ...
measures the past year's
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
s on a
stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...

stock
(a share), expressed as a percentage of the share's market value.
Yield to maturity The yield to maturity (YTM), book yield or redemption yield of a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within ...
is applied to a
fixed income Fixed income refers to any type of investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance ...
security. It is the holder's
ex-ante The term ''ex-ante'' (sometimes written ''ex ante'' or ''exante'') is a phrase meaning "before the event". Ex-ante or notional demand refers to the desire for goods and services which is not backed by the ability to pay for those goods and services ...
total return The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest In finance Finance is the study ...
, calculated assuming it is held until maturity, and assuming there is no default, using the
internal rate of return Internal rate of return (IRR) is a method of calculating an investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, ...
(IRR) method. Because of these differences, the yields comparisons between different yields measured on different types of financial products should be treated with caution. This page is mainly a series of links to other pages with increased details.


Bonds, notes, bills

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 ...
(also nominal rate) is the yearly total of
coupons 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 ...
(or interest) paid divided by the Principal (Face) Value of the bond. The
current yield The current yield, interest yield, income yield, flat yield, market yield, mark to market yield or running yield is a financial Finance is a term for the management, creation, and study of money and investments. Pamela Drake and Frank Fabozz ...
is those same payments divided by the bond's spot market price. The
yield to maturity The yield to maturity (YTM), book yield or redemption yield of a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within ...
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 (Treasury Inflation Protected Securities), also known as Inflation Linked fixed income. TIPS are sold by the US Treasury and have a "real yield". The bond or note's 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 and protect purchasing power. However, many economists believe that the CPI under-represents actual inflation. In the event of deflation over the life of this type of fixed income, TIPS still mature at the price at which they were sold (initial face). Losing money on TIPS if bought at the initial auction and held to maturity is not possible even if deflation was long lasting.


Preferred shares

Like bonds, preferred shares compensate owners with scheduled payments which resemble interest. However, preferred "interest" is actually in the form of a dividend. This is a significant accounting difference as preferred dividends, unlike debt interest, are charged after taxes and below net income, therefore reducing net income and ultimately earnings per share. Preferred shares may also contain conversion privileges which allow for their exchange into common stock. The dividend yield is the total yearly payments 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 Finance is a term for the management, creation, and study of money and investments. Pamela Drake and Frank Fabozz ...
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 The yield to maturity (YTM), book yield or redemption yield of a bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within ...
and yield to call calculated, the same way as for bonds.


Preferred trust units

Like preferred shares but units in a trust. Trusts have certain tax advantages to standard corporations and are typically deemed to be "flow-through" vehicles. Private mutual funds trusts are gaining in popularity in Canada following the changes to tax legislation which forced many publicly traded
royalty trust A royalty trust is a type of corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "bo ...
s to convert back into corporations. Investors seeking the high yields typically associated with the energy royalty trusts are increasingly investing in private mutual energy fund trusts.


Common shares

Common shares will often pay out a portion of the earnings as dividends. The
dividend yield The dividend yield or dividend–price ratio of a share is the dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing t ...
is the total dollars (RMB, 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 reciprocal of what is called the
earnings yield Earning yield is the quotient of earnings per share (E), divided by the share price (P), giving E/P. It is the reciprocal of the P/E ratio. The earning yield is quoted as a percentage, and therefore allows immediate comparison to prevailing long-t ...
. 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 {{Unreferenced, date=February 2007 Return of capital (ROC) refers to principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academic officer of a university A university ( l ...
. $YearlyDistribution / $CostOfContract.


REITs, royalty trust, income trusts

Like annuities, distribution yields from
REITs A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office building, office and apartment buildings to warehouses, hospi ...
, Royalty trusts, and Income trusts often include cash that exceeds the income earned: that is
return of capital {{Unreferenced, date=February 2007 Return of capital (ROC) refers to principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academic officer of a university A university ( l ...
. $YearlyDistribution / $SharePrice.


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.


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. Higher yields allow owners to recoup their investments sooner, and so lessen risk. But on the other hand, a
high yield In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availab ...
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 In economics, inflation refers to a general progressive increase in prices 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 r ...

inflation
. Fears of high inflation in the future mean that investors ask for high yield (a low price vs the coupon) today. The maturity of the instrument is one of the elements that determines
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty Uncertainty refers to Epistemology, epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to ...

risk
. The relationship between yields and the maturity of instruments of similar credit worthiness, is described by the
yield curve In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated ...

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 Default may refer to: Law * Default (law) In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and infl ...
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.


See also

*
Ecological yield Ecological yield is the harvestable population growth Population growth is the increase in the number of individuals in a population. Global human population growth amounts to around 83 million annually, or 1.1% per year. The World population, glob ...
*
Yield curve In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated ...

Yield curve
*
30-day yield In the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists of 50 U.S. state, states, a Washing ...
*
7-day SEC yieldThe 7-day SEC Yield is a measure of performance in the interest rates An interest rate is the amount of interest Interest, in finance and economics, is payment from a debtor, borrower or deposit-taking financial institution to a lender or deposi ...
*
Nominal yield The coupon rate (nominal rate, or nominal yield) of a fixed income security Fixed income refers to any type of investment To invest is to allocate money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful mo ...
*
Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avail ...
* Roll yield


References

{{DEFAULTSORT:Yield (Finance) Fixed income analysis Financial markets