DEFINITION: “Yield” is a form of interest that functions as a term of art used by the financial industry.
Like all forms of interest, yield is an amount of money that is earned after a set period of time on a principal amount that an investor has loaned to another individual or institution.
However, the term “yield” usually refers to the interest earned on specific kinds of financial instruments.
More specifically, “yield” most often signifies the earnings on fixed-income securities (certificates of deposits, bonds, and real estate investments), on stocks (common, preferred, and convertible), or on annuities.
ETYMOLOGY: The word “yield” derives from the Old English word gieldan, meaning “to pay,” which is related to the Old High German word geltan, with the same meaning.
USAGE: The yield on a security must not be confused with changes in its market value.
The yield on a security, and the increase in its market value, if any, are separate and complementary components of the total earnings generated to an investor by a security.
There is a considerable technical vocabulary associated with the concept of “yield.”
Some of the best-known of these terms are the following:
- Coupon rate: the interest on a fixed-income security, expressed as a percentage of the security’s principal amount (“par value”). The coupon rate is also known as the “nominal rate.”
- Current yield: the interest on a fixed-income security, expressed as a ratio between the security’s annual interest payment at the coupon rate (the “coupon payment”) and its current market price.
- Yield-to-maturity: an estimate of the total rate of return anticipated to be earned by an investor over the life of a security. It is composed of all of a security’s estimated coupon payments, plus the original principal.
- Par yield: the current yield of a security under the assumption that its current market price is equal to its par value. A security’s par yield is also known as its “nominal value.”