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 f ...

, the yield on a

security" \n\n\nsecurity.txt is a proposed standard for websites' security information that is meant to allow security researchers to easily report security vulnerabilities. The standard prescribes a text file called \"security.txt\" in the well known locat ...

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 that is not backed by the ability to pay for those goods and servic ...

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 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 ...

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 Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt inst ...

, 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 inte ...

is the ratio of the annual interest (coupon) payment and the bond's market price. The yield to maturity 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 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 In finance, par yield (or par value yield) is the yield on a fixed income security assuming that its market price is equal to par value (also known as face value or nominal value). Par yield is used to derive the U.S. Treasury’s daily officia ...

assumes that the security's market price is equal to par value (also known as

face value The face value, sometimes called nominal value, is the value of a coin, bond, stamp or paper money as printed on the coin, stamp or bill itself by the issuing authority. The face value of coins, stamps, or bill is usually its legal value. Howe ...

or nominal value). It is the metric used in the U.S. Treasury's daily official "Treasury Par Yield Curve 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

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 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 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, including office and apartment buildings, warehouses, hospitals, shopping ce ...

, royalty trusts,

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

often include return of capital, 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 reduct ...

and the general outlook for the economy (the

business cycle Business cycles are intervals of 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 measured by examin ...

). 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.

Special cases

Coupon payments from floating rate bonds and notes and

Treasury Inflation Protected Securities United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Since 2012, U.S. gov ...

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.

References

{{DEFAULTSORT:Yield (Finance) Valuation (finance) Yield (finance) Financial economics