Yield

What does Yield mean in finance?

Yield refers to the earnings generated and realised on an investment over a particular period, expressed as a percentage of the investment's cost or current market value. It is a key indicator of an investment's profitability and is commonly used in the context of bonds, shares, and other financial instruments. Yield helps investors compare the income-producing potential of different investments and make informed decisions.

Types of Yield

Bond Yield

Bond yield measures the return an investor receives on a bond investment. There are several ways to calculate bond yield:

• Current Yield: This is the annual interest income divided by the bond's current market price. It provides a snapshot of the bond's income relative to its market price.
• Yield to Maturity (YTM): This is the total return an investor can expect to earn if the bond is held until maturity. YTM takes into account the bond's current market price, its par value, coupon interest payments, and the time remaining until maturity.
• Yield to Call (YTC): This is the yield calculated assuming the bond will be called (redeemed by the issuer) before its maturity date. YTC is relevant for callable bonds, which can be redeemed by the issuer at a predetermined price before maturity.

Dividend Yield

Dividend yield measures the income generated from a share investment relative to its current market price. It is calculated by dividing the annual dividend per share by the current share price:

Dividend Yield = (Annual Dividend per Share / Current Share Price) × 100%

For example, if a company pays an annual dividend of $1 per share and its current share price is $20, the dividend yield would be 5%.

Importance of Yield in Investing

• Income Generation: Yield indicates the income an investor can expect from an investment, which is crucial for those seeking regular income, such as retirees.
• Investment Comparison: Yield allows investors to compare the income potential of different investments, aiding in portfolio diversification and optimisation.
• Risk Assessment: Generally, higher yields may be associated with higher risk. Evaluating yield helps investors assess the risk-return profile of an investment.

Understanding yield is essential for making informed investment decisions and aligning investment choices with financial goals and risk tolerance.