Yield (finance)

The yield is the ratio of disbursements to the deposits of money or capital investment and is usually stated as a percentage per year. Since the yield usually refers to an annual return on capital that they can use the code profitability, which refers to a company's success, not be equated. The most common return code is the interest rate. The term is, however, not sharply defined, so that the classification in a particular market is hardly possible. There are different types of returns, although in cash or an affiliate of the investment yield risk must always be consulted.

Alternative definitions

• The yield refers to the overall success of an investment, measured as the actual return on capital employed. It is based on the yield revenues to the fund ( eg interest, dividends, realized capital gains ) and changes in the price of the fund's value.

• The reward should make evident how well a previously applied amount of money evolves. Regarding the new investment income On the other hand, the expectation of how an applied amount in the future affect, be expressed in terms of return on investment.

• Yield is the total annual income of invested capital, usually expressed as a percentage of the amount invested.

• Return referred to in contrast to interest the success of a direct participation in the form of capital, labor, real estate and / or raw materials at the end of a value chain is not necessarily limited to a period. If, however, frequently and thus often confused for better comparability in an annual percentage yield translated at rates of interest.

Basic formulas

In general, the difference between a revenue and an expense is considered in relation to this effort with the return:

With the return of the overall success of an investment than actual return on capital employed is usually measured.

In the basic formula of the return while the profit in proportion to capital:

If, for example, 16 €, and after the period of the investment or € 36 return achieved as profit 20 €, so the yield is 125 %.

The return is specified either as a percentage (125 %) or as a number ( decimal fraction, 1.25 ).

Types of returns

Return of an investment

The return was used to compare different investments. The background is that different types of investments often involve different income and cost components. So here are the returns the answer to the question of which interest rate per year would be required to come to the same investments.

When comparing means, the current yield could be used. It gives the average yield of total fixed-income securities that are in circulation, at.

For investments (in particular for bonds) of Yield to Maturity ( engl. yield to maturity ) is spoken. Is a prerequisite for their calculation that the security is held to maturity and has no options.

Often also referred to as return on (income ) tax to compare systems with different tax treatment together.

Return on investments

In the securities market, an interest rate is not determined, but it will set a price for a security. This price is the price of a security. The yield ( effective interest rate ) can be derived from this price. The yield of a security is thus that which is obtained for the securities in a year, minus the price paid today divided by the current price.

With

Return on bonds

The yield of a bond is not the same as the nominal interest rate, but also depends on the current share price and (residual) term.

To illustrate the relationship between yield and maturity, the yield curve can be used. It is reflected in the term structure of bond yields, that is, one can tell the difference between short-and long -term bonds. Normally, a yield curve is rising, as the return of a long -term bond is usually above the yields of short-term bonds. Decreases the curve, so are bond yields short-term bond yields over the long term.

Maturity yield of an n- year bond is defined as the constant annual interest rate, which today makes the bond price equal to the present value of future bond payment.

Suppose there is a bond of two years is held. This bond will result in a payment of 100 € at the end of two years. What is the investor interested in this case, what percentage of the bond pays for itself after the expiry of two years.

Period yield on a bond

The period yield on a bond is called Return. The return refers to a period of length T with intermediate coupon date.

Here is abstracted from transaction costs and taxes.

Common applications for the period yield, inter alia, in the calculation of critical values ​​and scenario analyzes.

The effective yield is in contrast to the normal interest rate, which refers to the face value of a security, the actual yield of a bond to. It is therefore, the actual monetary value flows back minus all costs, from a plant.

The dividend yield (dividend - price ratio) shows the ratio of paid-out dividend and share price. This is a comparison of different types of investments and the investor can deduce how much is the income from his shares.

Gross and net return

• Gross yield is the annual total return from a money market or capital investment, with no taxes, inflation, or similar factors are taken into account.

• The net yield is in most cases lower than the gross return, as it takes into account taxes and inflation and thus represents the real capital growth from a money market or capital investment. Therefore, the selection of a form of investment due to positive net returns should be done.

Continuous and discrete return

• Discrete return (one return, return): percentage increase of one point in time to another

• Constant Yield ( difference in log prices, log - returns): natural logarithm of the growth ratio

Time weighted and capital-weighted rate of return

• The time-weighted rate of return (geometric mean return ) shows how an early -scale amount of money in a later investment income transformed, under the assumption that during the observation horizon no deposits or withdrawals are made, or if it does exist, the return is adjusted for the payments.

• The capital-weighted rate of return ( internal rate of return, internal rate of return, IRR ) also shows how a previously applied amount of money in a later investment income transformed, but it is assumed here that deposits and withdrawals are made, that is, it takes place a weighting of the generated return on the assets employed. It is from the time of inflows and outflows dependent.

Both types are mostly as average returns ( ie annualized) and not specified as total return.

Promised and actual return

The promised yield is calculated in advance according to certain conventions (ex - ante). The actual return on the other hand is a subsequent concept ( ex-post), which takes into account the actual reinvestment opportunities.

Term rate of return on investments

The return on an investment is the ratio of the profit of the investment to the amount originally invested. An example of the application of the rate of return is the return on a company's investment in new production facilities.

Return of a portfolio

For an approximate calculation of the return earned in a year of a portfolio, which deposits and withdrawals are made during the year, the interest rate formula of Hardy serves.

Annualization

In order to make the returns of different asset classes with different lengths comparable investment periods (eg every quarter ), they are, that is based on the one-year period generally annualized.

Which is carried out at discrete Annualisation returns over the geometric mean and the arithmetic mean not. This means that the annual rate of return:

To calculate the total return from the individual annual returns, to use:

Risk and return

The return is subject to fluctuations from year to year. Thus, the return can almost never be planned without some risk of loss. In calculating the yield is meant by the risk, the uncertainty associated with the expected return occurs eventually. The risk is higher if the expected return on an investment is higher. Means that the investor can decide whether he with least risk, or for a particular risk would achieve the highest possible return on a particular rate of return. To measure the fluctuations in return the key figures expected value and standard deviation are used.

• Standard Deviation ::

• Example:

It can be distinguished in the consideration of risk in a systematic and specific risk. This distinction is made on the CAPM model. Systematic risk relates generally to investments that are subject to the fluctuations of the market (market risk). The investment can be planned perfectly, yet this risk. The specific risk arises differently for each investor, since this risk does not depend on market behavior. Here, each investor must try to keep the risk as low as possible.

Crucial when comparing several investment alternatives so that's associated with the particular form of investment risk. In order to make the return on different risky assets comparable, they are adjusted for risk (risk- adjusted ). A well-known, however, regarding the validity and controversial measure of risk-adjusted basis is the Sharpe ratio ( " Sharpe ratio ").