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Bond yield |
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Bond yieldYield calculations on bonds aim to show the return on a gilt or bond as a percentage of either its nominal value or its current price. There are three types of yield calculation that are commonly used:Nominal Yield (also known as 'flat yield')This is calculated by dividing the annual income on the bond by its nomina or 'par' value. So the nominal yield on a £100 bond which pays 5% interest per year is 5/100 x 100 = 5%.Current or 'Running Yield'This is calculated by dividing the annual income on the bond by its current market price. So if the market price of the £100 bond dropped to £95, the current yield on the bond at that time would be 5/95 x 100 = 5.36%. Note that as the market price of a bond drops, its yield goes up.Redemption Yield'The Redemption Yield shows what the total return on a bond would be if held to its maturity date. It reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures. The income element is the same 'current yield' calculation performed above. The gain/loss element is calculated by taking the difference between the current market price and the nominal value of the bond (e.g. in our example 100 - 95 = 5), dividing it by the number of years til maturity (assume 5 years for simplicity, so 5/5 = 1) and then dividing that figure by the current price of the bond (1/95 x 100 = 1.05%) The yield to redemption is the sum of the current yield (5.36%) and the capital yield (1.05%) = 6.41%.Similar MatchesPure yield pickup swapPure yield pickup swapMoving to higher yield-bonds. Dividend yieldDividend yieldThe annual dividend income per share received from a company divided by its current share price. Put simply - how much income are you getting out of the company for the capital you've got locked up in it?Dividend yields are calculated on the net dividend.Example: a company declares a net dividend of 2.1p per share. Its share price is 150p. To get the dividend yield, divide the net dividend by the current share price:2.10 /150 = 1.4%The dividend yield is 1.4%. Note that the higher the share price, the lower the dividend yield. Using the above example, if the shares rose to 200p, the yield would fall to 1.05%2.10/200 = 1.05%The problem for investors is that if a company has a low dividend yield compared to other companies in its sector, it can mean two things. Either it means the company's share price is high because the market reckons it's got great growth prospects and doesn't care too much about income, or it means that the company's a busted flush and can't afford to pay decent dividends. Yield spread strategiesYield spread strategiesInvestments that position a portfolio to capitalize on expected changes in yield spreads between sectors of the bond market. Earnings yieldEarnings yieldThe earnings of a company are its annual profits after deduction of tax, dividends to preference shareholders and bondholders. They are usually expressed on a per-share basis (e.g. 7p), and the earnings per share (EPS) figure is calculated by dividing total earnings by the average number of shares in issue for the relevant accounting period.e.g. earnings or £2m, with 10m shares in issue would give an EPS of 20pThe earnings yield is the EPS as a percentage of the current market price of the share. So if the EPS was 7p and the current market price is 116p, the earnings yield7 / 116 x 100 = 6.03%Earnings yield is not used as commonly as its reciprocal measure, the P/E ratio. On the same figures, the P/E would be:116 / 7 = 16.6 Constant yield methodConstant yield methodAllocation of annual interest on a zero-coupon security for income tax use. Further SuggestionsDiscount yieldExpected dividend yield Convenience yield Stripped yield Money market yield gross yield Corporate equivalent yield redemption yield yield curve Holding Period Yield (HPY) Required yield Coupon equivalent yield Yield to warrant expiration Yield to warrant call net yield Current yield Annual effective yield Parallel shift in the yield curve Effective annual yield yield to maturity yield gap Indicated yield Yield advantage Yield equivalence Yield spread |
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