Yield refers to the money that is returned to the holder of a security. It does not usually include price variations. Yield can be applied to different rates of return on stocks. These stocks could either be common, preferred or convertible. It also applies to fixed instruments which include notes, bills, strips and zero coupons. It may also be used for some insurance investment products like annuities, for example.
Yield can mean different things, however, depending on the situation. On one hand, it can mean the calculated rate of return given as a ratio or as an internal rate of return. It can refer to the owner’s total return or it can be used to just state a portion of the income. It can even exceed the income.
That is why yields should never be treated as if one type were equal to another. Here are some examples.
The nominal yield or coupon yield as it is sometimes referred to as is the total of coupons paid that is then divided by the Principal Value of the bond. This is done at the end of the fiscal year.
A current yield in reference to bonds, notes and bills is a payment or series of payments that are divided by the bond’s market price.
When discussing preferred shares, the current yield is also the payments divided by the market price. The dividend yield takes all of the monthly payments and divides the principal value of the preferred share.