Fundamental Financial Concept: Yield

What is a Finance yield?

Yield refers to the income of the investment returns over time. It  is typically expressed in percentage whereas the return implies the amount that was gained or lost in a particular investment. It is usually expressed in dollar value. Yield represents an income that are returned from a particular interest, like interest received from holding security. It if often presented in the percentage of Investment costs, face value or the current market value. The yield on an investment is dependent on the security value as they are subjected to fluctuations. It measures the income which include interest as well as dividend that is earned through investment while ignoring the capital gains. Yield on bond may have multiple yield options which have the exact nature of investment. The coupon is the rate of interest at which the bond is issued while the coupon rate is the yield that are paid for fixed-income security. It represents the annual coupon payment that are paid by the issuer in relation with the face value of bond or par value. The yield is forward-looking in against of return which is backward looking.

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What are the types of Yield?

A bond’s yield represents the expected rate of earnings that is generated and realized no the annualized investment that is made over a particular period of time. It is expressed in percentage or interest rate. There are different types of yield in finance which are explained in brief below:

Running Yield: It refers to the measurement of bond yield every year which is represented on the current market price value. It reflects the cumulative return or yield that are curenty held within the portfolio. It is somewhat similar to the dividend yield, but the difference lies in the fact the former describes the individual assets while the latter describes the entire group within the portfolio. Regular yields are figured on an annual basis, however, it is calculated by the investors more often.

Nominal Yield: It is a refers to the return from bond that is determined by the percentage of the face value of annual coupon payments of bond. It implies that the nominal yield is effectively, the coupon rate of the bond. It may or may not change depending upon the type of the bond.  

Yield to maturity (YTM)

The YTM describes the average yield or return that an investor may expect every year from a particular issue, on condition of (a) hold it until the maturity, (b) purchased at the market value of bond. The maturity value of the bond is calculated using the value of issue at maturity, the coupon payment and any type of capital gains or losses during the lifetime of the bond. The Yield to maturity believes that the coupon payments are reinvested into other bonds. This amount is further compared with different bonds for choosing among different bonds.

Tax-Equivalent Yield (TEY)

Municipal bonds refers to the bonds that are issued by the municipality or county to meet the capital expenditures and are mostly non-taxable. The TEY is the pretax yield that the taxable bond must posses to remain equivalent with the tax-free municipal bond. It is usually determined by the investor’s tax bracket.

Yield to call (YTC)

It refers to the bond’s yield at the time of its call date. The value of bonds doesn’t hold if the asset is not kept until the maturity. It only describes the value at the call date, which can be easily found on the bond prospectus . This value is dependent on the market price, coupon rate and the length of the call date.

SEC Yield

While there are a lot of variations for calculating other kinds of yields. The Securities and Exchange Commission have introduced the standard measure for calculating yield. It is aimed at offering measure for comparing different bond yields. The SEC is usually calculated after considering the fees associated with the fund.

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How do we calculate yield?

Yield is a term that is used to represent the earnings realized and generated from an investment over a particular period of time. It is generally expressed in percentage. This percentage is dependent on several factors such as the current market value, the amount invested into the security or bond, or the face value of the investment security. It includes both the interest as well as dividend earned from holding a security or bond. The yield is therefore considered as the major decision-making tool that is used by the companies and the investors.

The yield is generally calculated on an annualized basis, however, monthly or quarterly yields can also be computed and reported. Generally, the yield is calculated by dividing the interest received or dividend by either the current price or the amount originally invested.

Yield on Cost = Dividend/Purchase Price     or     Current Yield = Dividend / Current price

What does yield mean in investing?

In investing, it is defined as the income return on the investment. It represents the dividend or interest received by the investors on the amount invested or the current market value of the security, during a particular period of time.

Is yield the same as Dividend?

The dividend is basically the dollar amount that is paid on the investment in dividend paying stock. The dividend yield refers to the percentage relation between the dividend currently paid on the security and the current price of the stock. The dividend yield reflects the amount of dividend paid by the company in comparison with the current stock price. Yield and dividend cannot be said to completely identical as the dividend represents the amount paid by the company to its shareholders on the number of shares held by them. Yield, on the contrary, includes dividend as well as the interest that are paid by the issuer to the bondholder. Dividend forms the part of Yield, but the terms cannot be used interchangeably. The word ‘dividend’ are specific to the distribution of profits by the profit making entity to its shareholders. Whereas yield is a broader term that represents return on investment in the form of interest as well as dividend.