The term 'Yield' is included in the Banking edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
In business and finance, yield is the word that states the quantity of cash that comes back to a security’s owners. It is measured independently of variations in price. It proves to be a percentage of total return. It is used for measuring the return rates of fixed income investments, such as bonds, bills, strips, notes, and zero coupons; stocks, including common, convertible, and preferred; and various other insurance and investment hybrid products like annuities.
Yield can mean different things in varying situations. It is sometimes figured up as an IRR, or Internal Rate of Return, or alternatively as a ratio. Yield describes an investment owner’s entire return or a part of the income.
The end result of the many differences in yield is that they can not be compared one against the other. This is because they are not all the same from one branch of finance and investments to another. You could see numerous different formulas for figuring up yield used by different investments and groups.
Bonds are a classic example of this. Nominal yield is also known as coupon yield. This proves to be the face value of a bond divided into the annual interest total. Current yield instead is those interest payments over the bond’s price on the spot market.
A yield to maturity is the internal rate of return on the bond cash flow, including the bond principal when maturity arrives plus the interest received, and the purchase price. Finally, a bond’s yield to call is the bond’s cash flow internal rate of return if it is called in by the company at their earliest opportunity.
Bonds yields are unusual in that they vary inversely to the price of the bond. Should a bond price decline, then the yield will rise. If instead the rates of interest drop, then the bond’s price will go up in general.
Some securities come with real yields. TIPS are a primary example of this. A real yield means that the face value of the instrument will be adjusted upwards compared to the CPI inflation index. It would then be set against this principal that is adjusted to make certain that an investor makes a better return than the rate of inflation.
This ensures that his or her purchasing power is protected. TIPS are one rare investment that will not allow investors to lose money if they purchased them in the auction and keep them until they mature, either as a result of deflation, meaning falling prices, or inflation, signifying rising prices over time.