Yield

Yield refers to the income generated by an investment over time, typically expressed as a percentage of the investment’s cost or current market value. It is the return on an investment, usually calculated on an annual basis.

There are various types of yields, depending on the type of investment.

For bonds, the yield is the rate of return paid on the bond's face value. The most common type is the current yield, which is the annual interest payment divided by the bond’s current market price.

For example, if a bond pays $50 in interest per year and is purchased for $1,000, the yield would be 5% ($50 / $1,000).

In stocks, the dividend yield is the annual dividend payment divided by the stock’s market price. If a company pays $2 in dividends and the stock trades at $40, the dividend yield is 5%. This is like receiving an annual “gift” for owning the stock.

Yield to Maturity (YTM) is the total yield an investor will receive by holding a bond until maturity. It considers both interest payments and any capital gains or losses. For example, if one buys a bond for $950 that pays $50 annually and matures at $1,000, the YTM would be higher than the current yield. This is because, in addition to the $50 annual interest, they will earn a $50 capital gain when the bond matures.

The last type is yield on cost: this compares the annual income from an investment to the original cost. For instance, if one bought a stock for $10 and receive $1 annually in dividends, the yield on cost is 10%. If the stock price doubles to $20, the dividend yield drops, but the yield on cost remains at 10%.

In conclusion, yield is a key measure of an investment’s return, expressed as a percentage of its cost or market value. Understanding yield helps investors assess potential returns and make informed decisions based on their financial goals.