Yield


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:



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


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.



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 10year 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


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:



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


The
percentage of earnings paid to shareholders in dividends.
Calculated as:



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


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.



The APY is similar in nature to the annual percentage rate. Its usefulness
lies in its ability to standardize varying interestrate agreements into an
annualized percentage number.
For example, suppose you are considering whether to invest in a
oneyear zerocoupon bond that pays 6% upon maturity or a highyield 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 1.005^121 = 0.0617.


Annual Percentage Yield  APY


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.



The APY is similar in nature to the annual percentage rate. Its usefulness
lies in its ability to standardize varying interestrate agreements into an
annualized percentage number.
For example, suppose you are considering whether to invest in a
oneyear zerocoupon bond that pays 6% upon maturity or a highyield 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 1.005^121 = 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


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



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
shortterm loans, where ignoring compounding is less of an issue.


Compounding


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".



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.

