Yield

 

What does it Mean?

1. In general, yield is the annual rate of return for any investment and is expressed as a percentage.

2. With stocks, yield can refer to the rate of income generated from a stock in the form of regular dividends. This is often represented in percentage form, calculated as the annual dividend payments divided by the stock's current share price.

3. With bonds, yield is the effective rate of interest paid on a bond, calculated by the coupon rate divided by the bond's market price:

 

 

Investopedia Says...

1. Investors can use yield to measure the performance of their investments and compare it to the yield on other investments or securities. Higher risk securities generally offer higher expected yields as compensation for the additional risk incurred through ownership of the security.

2. Investors looking to generate income or cash flow streams from equity investments commonly look for stocks that pay high dividend yields, in other words, stocks that provide a relatively large amount of annual cash dividends for a relatively low share price.

3. Bonds are typically issued with fixed coupon payments (regular cash payments of a fixed dollar amount). Thus, bonds are typically valued in terms of the their yield - what dollar amount as coupon payments is received as compared to the bond's current market price.

 

Current Yield

 

What does it Mean?

Annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year. This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are constantly changing due to market factors.



Also referred to as "bond yield", or "dividend yield" for stocks.

 

Investopedia Says...

For example, if a bond is priced at $95.75 and has an annual coupon of $5.10, the current yield of the bond is 5.33%. If the bond is a 10-year bond with nine years remaining and you were only planning to hold it for one year, you would receive the $5.10, but your actual return would depend on the bond's price when you sold it. If, during this period, interest rates rose and the price of your bond fell to $87.34, your actual return for the period would be -3.5% (-$3.31/$95.75) because although you gained $5.10 in dividends, your capital loss was $8.41.

 

Dividend Yield

 

What does it Mean?

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

 

 

Investopedia Says...

Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable, dividend yields.

For example, if two companies both pay annual dividends of $1 per share, but ABC company's stock is trading at $20 while XYZ company's stock is trading at $40, then ABC has a dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other factors are equivalent, an investor looking to supplement his/her income would likely prefer ABC's stock over that of XYZ.

 

Dividend Payout Ratio

 

What does it Mean?

The percentage of earnings paid to shareholders in dividends.

Calculated as:

 

Investopedia Says...

The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio.

In the U.K. there is a similar ratio, which is known as dividend cover. It is calculated as earnings per share divided by dividend per share.

 

 

Annual Percentage Yield - APY

 

What does it Mean?

The effective annual rate of return taking into account the effect of compounding interest. APY is calculated by:

 
The resultant percentage number assumes that funds will remain in the investment vehicle for a full 365 days.

 

Investopedia Says...

The APY is similar in nature to the annual percentage rate. Its usefulness lies in its ability to standardize varying interest-rate agreements into an annualized percentage number.

For example, suppose you are considering whether to invest in a one-year zero-coupon bond that pays 6% upon maturity or a high-yield money market account that pays 0.5% per month with monthly compounding.

At first glance, the yields appear equal because 12 months multiplied by 0.5% equals 6%. However, when the effects of compounding are included by calculating the APY, we find that  the second investment actually yields 6.17%, as 1.005^12-1 = 0.0617.

 

 

Annual Percentage Yield - APY

 

What does it Mean?

The effective annual rate of return taking into account the effect of compounding interest. APY is calculated by:

 
The resultant percentage number assumes that funds will remain in the investment vehicle for a full 365 days.

 

Investopedia Says...

The APY is similar in nature to the annual percentage rate. Its usefulness lies in its ability to standardize varying interest-rate agreements into an annualized percentage number.

For example, suppose you are considering whether to invest in a one-year zero-coupon bond that pays 6% upon maturity or a high-yield money market account that pays 0.5% per month with monthly compounding.

At first glance, the yields appear equal because 12 months multiplied by 0.5% equals 6%. However, when the effects of compounding are included by calculating the APY, we find that  the second investment actually yields 6.17%, as 1.005^12-1 = 0.0617.

 

 

Yield (finance)

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In finance yield is a percentage that measures the cash returns to the owners of a security. Normally it does not include the price variations, at the difference of the total return.

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.

 Bonds

The coupon yield 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 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).

Preferred Shares

Like bonds, preferred shares compensate owners with scheduled payments. The payments are usually called dividends, although they may technically be considered interest.

The dividend yield is the total yearly payments divided by the principal value of the preferred share.

The current yield is those same payments divided by the preferred share's market price.

If the preferred share has a maturity (not always) there can also be a yield to maturity and yield to call calculated, the same way as for bonds.

Common Shares

Common shares will often pay out a portion of the earnings as dividends. The dividend yield is the total dollars (Yen, etc) paid in a year divided by the spot price of the shares. Most web sites and reports are updated with the expected future year's payments, not the past year's.

The Price/Earnings ratio quoted for common shares is the inverse of what is called the earnings yield. EarningsPerShare / SharePrice.

Annuities

The life annuities purchased to fund retirement pay out a higher yield than can be obtained with other instruments, because part of the payment comes from a return of capital. $YearlyDistribution / $CostOfContract.

REITS, Royalty trust, Income Trusts

Like annuities, distribution yields from REITS, Royalty trusts, and Income trusts often include cash that exceeds the income earned: that is return of capital. $YearlyDistribution / $SharePrice.

How to Evaluate the Yield %

All financial instruments compete with each other in the market place. Yield is one part of the total return of holding a security. A higher yield allows the owner to recoup his investment sooner, and so lessens risk. But on the other hand, a high yield may have resulted from a falling market value for the security as a result of higher risk.

Yield levels vary mainly with expectations of inflation. Fears of high inflation in the future mean that investors ask for high yield today.

The maturity of the instrument determines risk. The relationship between yields and the maturity of instruments of similar credit worthiness, is described by the yield curve. Long dated instruments typically have a higher yield than short dated instruments.

The yield of a debt instrument is generally linked to the credit worthiness and default probability of the issuer. The more the default risk, the higher the yield would be in most of the cases since issuers need to offer investors some compensation for the risk.

 

 

 

Simple Interest

 

What does it Mean?

A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods.



Where:
P is the loan amount
I is the interest rate
N is the duration of the loan, using number of periods

 

Investopedia Says...

Simple interest is called simple because it ignores the effects of compounding. The interest charge is always based on the original principal, so interest on interest is not included.  This method may be used to find the interest charge for short-term loans, where ignoring compounding is less of an issue.

 

 

Compounding

 

What does it Mean?

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings. 

Also known as "compound interest".  

 

Investopedia Says...

Suppose you invest $10,000 into Cory's Tequila Company (ticker: CTC). The first year, the shares rises 20%. Your investment is now worth $12,000. Based on good performance, you hold the stock. In Year 2, the shares appreciate another 20%. Therefore, your $12,000 grows to $14,400. Rather than your shares appreciating an additional $2,000 (20%) like they did in the first year, they appreciate an additional $400, because the $2,000 you gained in the first year grew by 20% too. If you extrapolate the process out, the numbers can start to get very big as your previous earnings start to provide returns. In fact, $10,000 invested at 20% annually for 25 years would grow to nearly $1,000,000 (and that's without adding any money to the investment)!

The power of compounding was said to be deemed the eighth wonder of the world - or so the story goes - by Albert Einstein.