Yield (finance)

In finance, the term yield describes the amount in cash (in percentage terms) that returns to the owners of a security, in the form of interest or dividends received from the security. Normally, it does not include the price variations, distinguishing it from the total return. Yield applies to various stated rates of return on stocks (common and preferred, and convertible), fixed income instruments (bonds, notes, bills, strips, zero coupon), and some other investment type insurance products (e.g. annuities).

The term is used in different situations to mean different things. It can be calculated as a ratio or as an internal rate of return (IRR). It may be used to state the owner's total return, or just a portion of income, or exceed the income.

Because of these differences, the yields from different uses should never be compared as if they were equal. This page is mainly a series of links to other pages with increased details.

The coupon rate (also nominal rate) is the yearly total of coupons (or interest) paid divided by the Principal (Face) Value of the bond.

The current yield is those same payments divided by the bond's spot market price.

The yield to maturity 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.

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