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Concept
Yield (finance)
Summary
In finance, the yield on a security is a measure of the ex-ante return to a holder of the security. It is one component of return on an investment, the other component being the change in the market price of the security. It is a measure applied to fixed income securities, common stocks, preferred stocks, convertible stocks and bonds, annuities and real estate investments.
There are various types of yield, and the method of calculation depends on the particular type of yield and the type of security.
Bond valuation
The coupon rate (or nominal rate) on a fixed income security is the interest that the issuer agrees to pay to the security holder each year, expressed as a percentage of the security's principal amount (par value).
The current yield is the ratio of the annual interest (coupon) payment and the bond's market price.
The yield to maturity is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, holds it to maturity, and receives all interest payments and the payment of par value on schedule. Unlike current yield, it takes into account the payment of principal to the bondholder when the bond matures.
For bonds with embedded call or put options:
yield to call uses the same methodology as the yield to maturity, but assumes that the issuer calls the bond at the first opportunity instead of allowing it to be held until maturity;
yield to put assumes that the bondholder sells the bond back to the issuer at the first opportunity; and
yield to worst is the lowest of the yield to all possible call dates, yield to all possible put dates and yield to maturity.
Par yield assumes that the security's market price is equal to par value (also known as face value or nominal value). It is the metric used in the U.S. Treasury's daily official "Treasury Par Yield Curve Rates".
The dividend rate is the total amount of dividends paid in a year, divided by the principal value of the preferred share. The current yield is those same payments divided by the preferred share's market price.
Official source
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