What It Is:
How It Works/Example:
In general, yield is calculated as follows:
The term yield may refer to slightly different aspects of a return for variable types of investments. For example, a yield on bonds, such as the coupon yield is the annual interest paid on the principal amount of the bond. Current yield is the coupon yield on a bond at a specific point in the time before the bond maturity. A yield to maturity of a bond is the internal rate of return on a bond's cash flow, including the cost of the bonds, period payments from the bonds, if any, and the return of the principal at redemption.
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In equities, yields on preferred shares are similar to bond yields. For example, the dividend yield is the total payments in a year from the preferred shares divided by the principal value of the preferred shares. The current yield refers to the annual payments divided by the current market price.
Why It Matters:
While yields of various investments do not explain the reasons for the gains and losses, they may mask declines in the underlying value of the assets or the effects of inflation. Using the yield is a convenient way of comparing the returns on various financial investments.