Investment Basics: What is the Meaning of Yield in Finance?
December 12, 2017
By Colin OShea
It’s only five letters and one syllable, but if someone asked you to define yield, could you? In the world of investing, “yield” can have a variety of meanings.
The Definition of Yield in Finance
Yield can range in meaning from a security’s annual percentage rate of return to the annual income from an investment as a percentage of the price at a particular point in time.
Here’s a look at some common definitions and ways to calculate yield in the world of finance:
Dividend yield is a stock’s annual cash dividend divided by the closing price of the stock. It tells investors how much annual income to expect from the stock, relative to other stocks.
Current yield is a bond’s annual interest payment divided by the bond’s current market price. Current yield fluctuates based on the price at which a bond is trading for on the secondary market.
Coupon yield is the annual interest paid on a bond shown as a percentage of the bond’s value at maturity. Established when the bond is issued, it shows how much income can be expected each year the investor owns the bond. Coupon yield is fixed and therefore not affected by price fluctuations in the secondary markets.
Yield to Maturity
Yield to maturity is the rate of return an investor could expect if a bond were held to maturity and all interest payments were reinvested at the yield-to-maturity rate. Yield to maturity includes coupon income, earnings on reinvested income, and capital gains or losses.
Taxable-equivalent yield is the yield on a taxable bond that would give an investor the same after-tax yield as a particular tax-exempt bond. It allows investors to compare the yield of a tax-exempt bond with that of a taxable bond to determine which bond offers a higher yield in the investor’s tax bracket.
Contact an SNB Wealth Management Professional today to learn more!