In finance and investments, “yield” refers to the income generated by an investment, typically expressed as a percentage of the investment’s price or its face value. It is an important metric for investors as it indicates how much money they can expect to earn from their investment. There are several types of yields, each calculated differently:
- Coupon Yield: For bonds, the yield is often referred to as the coupon yield. It represents the annual interest payment made by the issuer relative to the bond’s face value. For example, if a bond has a face value of $1,000 and an annual coupon payment of $50, the coupon yield would be 5% ($50/$1,000).
- Current Yield: Current yield is a measure of the annual income an investor can expect to receive from a bond, considering its current market price. It is calculated by dividing the bond’s annual interest payment (coupon) by its current market price. For example, if a bond with a $50 annual coupon is trading at $1,000, the current yield would be 5% ($50/$1,000). Current yield does not consider any capital gains or losses if the bond is held to maturity.
- Yield to Maturity (YTM): YTM is the total return anticipated on a bond if it is held until it matures. It includes not only the annual interest payments (coupon), but also any gain or loss in the bond’s price if it is purchased at a discount or premium to its face value. YTM is a more complex calculation that considers the time value of money, the bond’s coupon rate, its current market price, and the number of years to maturity.
- Yield to Call (YTC): Yield to call is similar to YTM, but it takes into account that some bonds can be called by the issuer before they mature. YTC calculates the yield an investor can expect if the bond is called by the issuer at a specific call date and price.
- Yield to Worst (YTW): Yield to worst is the lowest potential yield an investor can receive, considering all possible call dates, refunding scenarios, and maturity date. It provides a conservative estimate of the investment’s return under various conditions.
These different yield metrics help investors compare and evaluate different investment opportunities, especially in the bond market, where yields play a significant role in the decision-making process.