# yield

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## Yield

## Yield

## yield

*return*. See also current yield, dividend yield, yield to average life, yield to call, yield to maturity, yield to put.

## Yield.

Yield is the rate of return on an investment expressed as a percent.

Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment.

In the case of stocks, yield is the dividend you receive per share divided by the stock's price per share. With bonds, it is the interest divided by the price you paid. Current yield, in contrast, is the interest or dividends divided by the current market price.

In the case of bonds, the yield on your investment and the interest rate your investment pays are sometimes, but by no means always, the same. If the price you pay for a bond is higher or lower than par, the yield will be different from the interest rate.

For example, if you pay $950 for a bond with a par value of $1,000 that pays 6% interest, or $60 a year, your yield is 6.3% ($60 ÷ $950 = 0.0631). But if you paid $1,100 for the same bond, your yield would be only 5.5% ($60 ÷ $1,100 = 0.0545).

## yield

the return on a FINANCIAL SECURITY, expressed in money terms, related to the current market price of that security, to show the percentage return on the investment. Yield can refer to the INTEREST RATE payable on the market price of a BOND (INTEREST YIELD); or DIVIDEND rate payable on the market price of a SHARE (DIVIDEND YIELD); or company profit per share (after tax) related to the price of the share (EARNINGS YIELD). For example, a bond with a face value of £100 and a rate of interest of 10% generates a nominal return of £10 per year. If, however, the bond can be purchased for £50 on the open market, then the yield is 20%, representing 20% return on the £50 invested. The lower the purchase price of a bond or share with a given coupon rate of interest or dividend or profit, the higher its yield will be, and vice versa. There is thus an inverse relationship between the price paid for a bond or share and its yield. The term*flat yield*or

*current yield*is sometimes used to describe a yield calculation which does not take account of the redemption value of a bond. Yields which take into account not only the annual interest receivable but also any capital profit/loss on redemption of the bond are termed

*redemption yields.*Where the current market price of a bond is below its specified redemption price, the potential profit on redemption must be divided by the number of years to the redemption date of the bond, and this annual profit equivalent added to the flat yield on the bond to arrive at its redemption yield. Where the current market price of the bond is above its specified redemption price the annualized potential loss on redemption must be deducted from the flat yield in calculating redemption yield. For example, a bond offering an interest payment of £10 per year and with a current market price of £50 would have a flat yield of 20%. If, in addition, the specified redemption price of the bond is £100 in five years' time, then the bond promises a potential profit of £100 – £50 = £50 which is equivalent to an annualized profit of £50 ÷ 5 = £10 per year or an additional return of £10 ÷ £50 or 10%. This would be added to the flat yield of 20% to give a redemption yield of 30%.

## yield

the return on a FINANCIAL SECURITY, expressed in money terms, related to the current market price of that security to show the percentage return on the investment. For example, a financial security (e.g. a BOND) with a face value of £100 and an INTEREST RATE of 5% generates a nominal return of £5 per year. If, however, the bond can be purchased for £50 on the open market, then the yield is 10%, representing 10% return on the £50 invested. The lower the purchase price of a bond or share with a given coupon rate of interest or dividend or profit, the higher its yield will be, and vice-versa. There is thus an inverse relationship between the price paid for a bond or share and its yield.The term *flat yield * or *current yield * is sometimes used to describe a yield calculation that does not take account of the redemption value of a bond. Such a calculation would be appropriate for IRREDEEMABLE FINANCIAL SECURITIES. Yields that take into account not only the annual interest receivable but also any capital profit/loss on redemption of the bond are termed *redemption yields. * Where the current market price of a bond is below its specified redemption price, the potential profit on redemption must be divided by the number of years to the redemption date of the bond, and this annual profit equivalent added to the flat yield on the bond to arrive at its redemption yield. Where the current market price of the bond is above its specified redemption price, the annualized potential loss on redemption must be deducted from the flat yield in calculating redemption yield. For example, a bond offering an interest payment of £5 per year and with a current market price of £50 would have a flat yield of 10%. If, in addition, the specified redemption price of the bond is £100 in five years’ time, then the bond promises a potential profit of £100 - £50 = £50, which is equivalent to an annualized profit of £50 ÷ 5 = £10 per year or an additional return of £10 ÷ £50 or 20%. This would be added to the flat yield of 10% to give a redemption yield of 30%. Such a calculation would be appropriate for REDEEMABLE FINANCIAL SECURITIES.Yield can refer to the interest rate payable on the market price of a bond (INTEREST YIELD); or DIVIDEND rate payable on the market price of a SHARE (DIVIDEND YIELD); or company profit per share (after tax) related to the price of the share (EARNINGS YIELD).

## yield

A measurement of the rate of earnings for an investment.