Introduction
Yield or bond yield points to the returns provided and realised by an investor on his investment over a given timeframe. Yield is expressed as a percentage of the amount invested on the market or fave value of the instrument.
Yield covers the dividends or the interest obtained for holding a specific security. Yields are further classified as anticipated and known, depending on the characteristics and evaluation (which can be varying or constant) of the instrument.
Yield can be considered as a measure of the cash inflow which investors receive on their investments on securities. Yields can be calculated on a periodic basis such as monthly, quarterly, or annually. However, yields are mostly computed on an annual basis.
One should not think of yield as the total return. For a holistic calculation, the measure of an investment’s return is done through total return.
Understanding Yield
Let us consider an example to understand the yield on investment better. Return on investment in stocks comes in two forms.
The first one is the increase in the stock price. For instance, investors buy a stock at Rs 100 per share, and after about six months, the stock price rises to Rs 120.
Another one is that the stocks may go on to pay dividends (say Rs 2 per share over the year). In this way, the overall return can be calculated by dividing the sum of the increase in the share price and the dividends received by the initial price of the share.
The total return on the example explained above can be calculated, as shown below: Total Return = (Increase in the Price + Dividend Received) / Initial Price = (Rs 20 + Rs 2) / Rs 100 = 0.22 = 22%
Nevertheless, the yield does not indicate the variations seen in the price, such as the variation in share price from Rs 100 to Rs 120. This is where one can make use of the yield.
