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Type of Yields
The yield is the annual
amount received from an investment, expressed as a percentage. The typical
kinds of yields used by investors are:
·
Coupon Rate
– The stated annual interest paid on a bond, expressed as a percentage of
par value.
·
Current Yield –
The annual interest payout on the bond, expressed as a percentage of the
current market value.
·
Yield-to-Maturity (YTM) –
The all-in interest rate earned on
the bond, incorporating both the annual interest paid, as well as
adjustments for any premiums or discounts realized from the purchase. It’s
the interest rate used to discount the cash flows. The YTM calculation
assumes the bond will be held to maturity.
·
Yield-to-Call (YTC) –
The all-in interest rate earned on the
bond that is held to its call date, using the bond’s stated call price (call
premium), and expressed as a percentage.
·
Yield-to-Put (YTP) –
The all-in interest rate if held to the
bond’s put date.
·
Yield-to-Worst (YTW) –
Lowest of the YTM or YTC
calculations. It’s used by conservative investors as an estimate of the
expected yield. It assumes the worst possible scheduled scenario for the
repayment of the bonds, and considers all the possible call date options.
·
Tax Equivalent Yield (TEY)
– The yield that a taxable bond
would have to pay to be equivalent to a tax-free bond
As we move through the
subject of bonds, you will find that there are multiple
market factors that influence bond rates. The base rate always starts with a
secure market rate; the rate is then increased as the level of risk
increases. Some of the typical risk factors that affect the rate are the
credit worthiness of the issuer and the terms of repayment.
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