Yield is used to describe a certain amount earned on a security, over a particular period of time. It refers to the interest or dividend earned on debt or equity, respectively, and is conventionally expressed annually as a percentage based on the current market value or face value of the security.
Formula for Yield
Yielding is a measure of cash flow that an investor gets on the amount invested in a security. It is mostly computed on an annual basis, though other variations like quarterly and monthly yields are also used. It should not be confused with total return, which is a more comprehensive measure of return on investment. The formula is represented as:
Yield = Net Realized Return / Principal Amount
Example: The gains and return on stock investments can come in two forms. First, it can be in terms of price rise, where an investor purchases a stock at 1000 per share and after a year they sell it for 100. Second, the stock may pay a dividend, say of 2 per share, during the year. The yielding would be the appreciation in the share price plus any dividends paid, divided by the original price of the stock. Yields can vary based on the invested security, the duration of investment, and the return amount.
Types of Yields
The Yield on Bonds: It is the return an investor realizes on a bond. The current yielding is a function of the bond’s price and its coupon or interest payment, which will be more accurate than the coupon yield if the price of the bond is different than its face value. More complex calculations of a bond’s yielding will account for the time value of money and compounding interest payments. These calculations include yield to maturity, bond equivalent yield, and effective annual yield.