Financial Terms related to Yield

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YIELD
Annual percentage yield

• Abbreviated APY. The effective, or true, annual rate of return. The APY is the rate
actually earned or paid in one year, taking into account the affect of compounding.
The APY is calculated by taking one plus the periodic rate and raising it to the
number of periods in a year. For example, a 1% per month rate has an APY of
12.68% (1.01^12).

Average dividend yield

• Combined with price appreciation, the average dividend yield (if any) can show a
potential total return from a security investment. The formula for the average
dividend yield is:
(EPS *Average Payout) / current price
where EPS = Estimated Future High EPS / (1 + EPS Growth) 2.5
Companies that pay a dividend will generally increase the dividend as EPS grow.
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Share price growth will usually follow the dividend increases, and thus keep dividend
yield at a constant percentage.

Bond equivalent yield

• Is the procedure which relates discounted rates such as treasury bills and
eurodollars to a bond standard. It is typical for discounted paper to be computed on
the basis of a 360-day year whereas bonds are usually based on a 365 day year. If
this equivalency is not done then the quoted short-term rates for discounted
instruments may be understated.

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• The annualized yield to maturity computed by doubling the semiannual yield.

• Bond yield calculated on an annual percentage rate method. Differs from annual
effective yield.

Capital gains yield

• The price change portion of a stock's return.

Convenience yield

• The extra advantage that firms derive from holding the commodity rather than the
future.

• Is the assumed or expected benefit of holding a long position in a physical

commodity. Othen this holding is to satisfy existing near-term delivery commitments
or to maintain uninterrupted manufacturing processes. It highlights the marginal
value of an inventory relative to the anticipated usage. High convenience yields tend
to occur in inverted or backwardation markets. In these situations, the costs of being
without the physical commodity are greater than the premium paid to hold the
commodity. A positive convenience yield is greater than the sum of the financing
plus other storage carrying costs.

Cost yield

• The annual income from an investment divided by the purchase cost. Because it
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does not include the effect of premiums and discounts which may have been
included in the purchase cost, it is an incomplete measure of return.

Coupon equivalent yield

• True interest cost expressed on the basis of a 365-day year.

Current yield

• Coupon payments on a security as a percentage of the security's market price. In

many instances the price should be gross of accrued interest, particularly on

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instruments where no coupon is left to be paid until maturity.

• The annual income from an investment divided by the current market value. Since
the mathematical calculation relies on the current market value rather than the
investor's cost, current yield is unrelated to the actual return the investor will earn if
the security is held to maturity.

• Annual income (interest or dividends) divided by the current price of the security.
For stocks, this is the same as the Dividend Yield.

• For bonds or notes, the coupon rate divided by the market price of the bond.

Dividend yield

• Is a term that can have several different meanings. It can refer to an annualized
(cash) dividend rate of return. This is computed by dividing the cash dividend by the
price per share at the time of purchase. If the stock were trading at 100 and the
dividends equaled $2.80, then the yield would be 2.80 percent. Also, the term is
used on the assumption that the current trading price is the implied purchase price.
The computation process remains the same.

• The dividends per share paid to shareholders, expressed as a percentage of the

share price. Total return on your stock investment is usually measured by adding the
dividend yield percentage to the percentage return from price growth of the stock.
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Dividend yield funds

• Indicated yield represents return on a share of a mutual fund held over the past
12months. Assumes fund was purchased 1 year ago. Reflects effect of sales
charges (at current rates), but not redemption charges.

Dividend yield stocks

• Indicated yield represents annual dividends divided by current stock price.

Earnings yield

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• The ratio of earnings per share after allowing for tax and interest payments on fixed
interest debt, to the current share price. The inverse of the price/earnings ratio. It's
the Total Twelve Months earnings divided by number of outstanding shares, divided
by the recent price, multiplied by 100. The end result is shown in percentage.

• Earnings per share for the most recent 12 months divided by market price per
share. Relates the generation of earnings to share price. It is the inverse of the
Price-Earnings Ratio.

Effective annual yield

• Annualized interest rate on a security computed using compound interest

techniques.

Equivalent bond yield

• Annual yield on a short-term, non-interest bearing security calculated so as to be

comparable to yields quoted on coupon securities.

• Annual yield on a short-term, non-interest-bearing security calculated so as to be

comparable to yields quoted on coupon securities.

Equivalent taxable yield

• The yield that must be offered on a taxable bond issue to give the same after-tax
yield as a tax-exempt issue.
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• The yield on a taxable security that would leave the investor with the same aftertax
return he would earn by holding a tax-exempt municipal; for example, for an investor
taxed at a 50% marginal rate, equivalent taxable yield on a muni note issued at 3%
would be 6%.

Flat yield curve

• A yield curve that reflects relatively similar borrowing costs for both short- and
longer-term loans.

• A chart showing the yields of bonds with short maturities as equal to the yields of

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bonds with long maturities. See also: Inverted Yield Curve; Normal Yield Curve;
Yield Curve.

Flattening of the yield curve

• A change in the yield curve where the spread between the yield on a long-term and
short-term Treasury has decreased. Compare steepening of the yield curve and
butterfly shift.

High yield

• The highest Dividend Yield for a particular year. It is useful to measure the current
dividend yield against the historical high yield. If the current yield is lower, then there
may be room for an increase in dividend to bring the yield closer to the former high.

High yield bond

• See:junk bond.

Holding period return/yield

• Income plus price appreciation during a specified time period divided by the cost of
the investment.

Indicated yield

• The yield that a share of stock would return based on its current Indicated
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Dividend, calculated by dividing the indicated dividend by the current share price.

• The yield, based on the most recent quarterly rate times four. To determine the
yield, divide the annual dividend by the price of the stock. The resulting number is
represented as a percentage. See: dividend yield

Inverted yield curve

• A downward-sloping yield curve that indicates generally cheaper long-term

borrowing costs than short-term borrowing costs.

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• A chart showing long-term debt instruments having lower yields than short-term
debt instruments. Also known as a Negative Yield Curve. See also: Flat Yield Curve;
Normal Yield Curve.

• Is the market condition whereby the near-term interest rates are higher than long-
term interest rates. For example, the two year rate is greater than the ten year rate;
or, the spot (overnight) rate is higher than the thirty year rate. This inversion may be
induced or result from changes in monetary policy, foreign exchange movements,
immediate liquidity needs within the financial system, constrictions in money/credit
and other financial forces.

Liquid yield option note

• Abbreviated LYON. Zero-coupon, callable, putable, convertible bond invented by

Merrill Lynch & Co.

Negative yield curve

• See Inverted Yield Curve.

Nominal yield

• Also known as Coupon Rate and Stated Yield. The interest rate stated on the face
of a bond that represents the percentage of interest to be paid by the issuer on the
face value of the bond.
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Non parallel shift in the yield curve

• A shift in the yield curve in which yields do not change by the same number of
basis points for every maturity. Related: Parallel shift in the yield curve.

Normal yield curve

• An upward-sloping yield curve that indicates generally cheaper short-term

borrowing costs than long-term borrowing costs.

• Also known as Positive Yield Curve. A chart showing long-term debt instruments

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having higher yields than short-term debt instruments. See also: Flat Yield Curve;
Inverted Yield Curve; Yield Curve.

Parallel shift in the yield curve

• A shift in the yield curve in which the change in the yield on all maturities is the
same number of basis points. In other words, if the 3 month T-bill increases 100
basis points (one percent), then the 6 month, 1 year, 5 year, 10 year, 20 year, and
30 year rates increase by 100 basis points as well. Related: Non-parallel shift in the
yield curve.

Positive yield curve

• See Nominal Yield Curve.

Potential average dividend yield

• Suggests the potential percentage dividend payments, compounded yearly over

the next 5 years. Combined with price appreciation, Yield makes up the possible
total return percentage.

Pure yield pickup swap

• Moving to higher yield bonds.

Realized compound yield

• Yield assuming that coupon payments are invested at the going market interest
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rate at the time of their receipt and rolled over until the bond matures.

Realized yield

• The change in value of the portfolio due to interest received and interest earned
and realized gains and losses. It does not give effect to changes in market value on
securities in the portfolio not yet sold.

Relative yield spread

• The ratio of the yield spread to the yield level.

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Reoffering yield

• In a purchase and sale, the yield to maturity at which the underwriter offers to sell
the bonds to investors.

Required yield

• Generally referring to bonds, the yield required by the marketplace to match

available returns for financial instruments with comparable risk.

Riding the yield curve

• Buying long-term bonds in anticipation of capital gains as yields fall with the
declining maturity of the bonds.

Stated yield

• See Nominal Yield.

Steepening of the yield curve

• A change in the yield curve where the spread between the yield on a long-term and
short-term Treasury has increased. Compare flattening of the yield curve and
butterfly shift.

Weighted average portfolio yield

• The weighted average of the yield of all the bonds in a portfolio.

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Yield

• The rate of annual income return on an investment, expressed as a percentage.

Yield does not include capital gains. (a) INCOME YIELD is obtained by dividing the
current dollar income by the current market price for the security. (b) NET YIELD or
YIELD TO MATURITY is the current income yield minus any premium above par or
plus any discount from par in purchase price, with the adjustment spread over the
period from the date of purchase to the date of maturity of the bond.

• The yield is the rate of return that investors require from the bond. Equivalently, it is

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the rate of return that they require from bonds of similar risk.

• (1) The amount of interest paid on a bond or stock divided by the price; a measure
of the income generated by the security. (2) The rate of return on an investment,
usually expressed as an annual percentage rate. A yield is not a total return
measure because it does not include capital gains or losses. See also: Current
Yield; Dividend Yield; Nominal Yield.

• The percentage rate of return paid on a stock in the form of dividends, or the
effective rate of interest paid on a bond or note.

• Is the rate of return on an asset. It is frequently expressed as a percent of the

current market price.

Yield burning

• Is the activity whereby yields on treasury securities were (artificially) lowered to

purchasing municipal organizations by raising the prices of those treasury or
equivalent securities. This increase in prices caused these transactions to be
conducted at levels which were higher than the prevailing market.

Yield curve

• A graph of the term structure of interest rates that depicts the relationship between
the yield to maturity of a security (y-axis) and the time to maturity (x-axis); it shows
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the pattern of interest rates on securities of equal quality and different maturity.

• A graph showing, for securities that all expose the investor to the same credit risk,
the relationship at a given point in time between yield and current maturity. Yield
curves are typically drawn using yields on governments of various maturities. It is
also called the termstructure of interest rates. Typically the yield curve rises with
maturity.

• A graphic representation of a curve that shows Interest Rates at a specific point for
all securities having equal risk but different maturity dates. Usually, government

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securities are used to construct such curves. See also: Flat Yield Curve; Inverted
Yield Curve; Normal Yield Curve.

• The graphical depiction of the relationship between the yield on bonds of the same
credit quality but different maturities. Related: Term structure of interest rates.
Harvey (1991) finds that the inversions of the yield curve (short-term rates greater
than long term rates) have preceded the last five U.S. recessions. The yield curve
can accurately forecast the turning points of the business cycle.

• Refers to the graghical or tabular representation of interest rates across different

maturities. The presentation often starts with the shortest term rates and extends
towards longer maturities. It reflects the market's views about implied
inflation/deflation, liquidity, economic and financial activity and other market forces.

Yield curve option pricing models

• Models that can incorporate different volatility assumptions along the yield curve,
such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing
models.

Yield curve strategies

• Positioning a portfolio to capitalize on expected changes in the shape of the

Treasury yield curve.
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Yield ratio

• The quotient of two bond yields.

Yield spread strategies

• Strategies that involve positioning a portfolio to capitalize on expected changes in

yield spreads between sectors of the bond market.

Yield to call

• The percentage rate of a bond or note, if you were to buy and hold the security until

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the call date. This yield is valid only if the security is called prior to maturity.
Generally bonds are callable over several years and normally are called at a slight
premium. The calculation of yield to call is based on the coupon rate, length of time
to the call and the market price.

Yield to call, option or event date

• Is akin to Yield to Maturity but adjusts for a short life expectancy. It is the rate of
return which is measured by the current expected income stream relative to the
prevailing market price assuming that the asset is held until the exercise of the first
option or termination event. If the instrument is trading at a discount, then the yield to
call, option or event date, will be greater than the coupon rate. If the instrument is
trading at a premium, then the yield to call, option or event date, will be less than the
coupon rate.

Yield to maturity

• The annualized internal rate of return on an investment that equates the expected
cash flows from the investment to its cost.

• The rate of return investors expect to earn if they buy a bond at a specific price and
hold it until it matures. Assumes that issuer makes all scheduled interest and
principal payments as promised. Annual rate of interest earned on a security
purchased on a given day and held to maturity. This is an ex ante (forecast)
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calculation that assumes the coupon interest, when received is reinvested at YTM
for the remaining term to maturity. It is that discount rate that equates the current
price of the bond with the sum of the discounted value of all promised cash flows.

• Abbreviated YTM. The rate of return yielded by a debt security held to maturity
when both interest payments and the investor's capital gain or loss on the security
are taken into account. For a risk-free bond, the YTM equals the market
capitalization rate.

• The rate of return anticipated on a bond if it is held until the Maturity Date.

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• The percentage rate of return paid on a bond, note or other fixed income security if
you buy and hold it to its maturity date. The calculation for YTM is based on the
coupon rate, length of time to maturity and market price. It assumes that coupon
interest paid over the life of the bond will be reinvested at the same rate.

• Is the rate of return which is measured by the current expected income stream
relative to the prevailing market price assuming that the asset is held until maturity. If
the instrument is trading at a discount, then the yield to maturity will be greater than
the coupon rate. If the instrument is trading at a premium, then the yield to maturity
will be less than the coupon rate.

Yield to worst

• The bond yield computed by using the lower of either the yield to maturity or the
yield to call on every possible call date.