What does yield actually mean?Needs one idea
Four different numbers travel under that one word, and a quoted yield tells you almost nothing until you know which of them it is.
3 min read · 549 words
It means whatever the person quoting it decided it means, which is why two sources can put two different yields on the same bond without either of them being wrong. There are four common meanings and they answer four different questions.
The four
| Name | What it is | What it assumes |
|---|---|---|
| Coupon | The stated interest, as a share of face value | Nothing. It is a contractual term and never changes |
| Current yield | Annual coupon ÷ current price | You hold for a year and ignore what happens at maturity |
| Yield to maturity | The single rate at which all future payments discount to today's price | You hold to the end and every coupon is reinvested at that same rate |
| Dividend yield | Dividend per share ÷ share price | The dividend continues. Nothing obliges it to |
Where they come apart
A bond with a 5% coupon, priced at 90, with three years to run:
- Coupon: 5%. It was 5% when it was issued and it will be 5% on the day it matures.
- Current yield: 5 ÷ 90 = about 5.6%. Higher than the coupon, because you paid less than face value for the same payments.
- Yield to maturity: higher still, because on top of the coupons you also receive 100 at the end for something that cost 90 — a gain of 10 spread over three years.
Priced above 100 the order reverses: the yield to maturity is below the current yield, because the price falls back to 100 by maturity and that loss is part of the return. This is the whole answer to why a bond's price moves seen from the other end.
The assumption inside yield to maturity
It is the most quoted and the most conditional. It assumes every coupon is reinvested at the same rate as the yield itself. If rates fall, the coupons are reinvested at less than that and the realised return is lower; if rates rise, higher. The number is exact and its assumption is not, which is a combination worth remembering whenever a single figure is presented as a return.
What the yield is telling you works this through properly, and the site's calculators recompute it rather than quoting it.
Dividend yield is the odd one out
The three bond measures describe payments somebody is contractually obliged to make. A dividend is not one of those. It is declared, it can be cut, and the yield is calculated from what was paid in the past divided by a price today.
That division has a trap in it: if the price falls and the dividend has not yet been cut, the yield rises. A high dividend yield can therefore be a statement about the dividend or a statement about the price, and the number alone does not say which.
Which one to look for
- Comparing two bonds: yield to maturity, on the same convention, or the comparison is between two different questions.
- Asking what lands in the account this year: current yield, or for a fund, the distribution yield.
- Reading a fund factsheet: check whether it quotes yield before or after charges, and whether it is historic or estimated. The factsheet playbook is about exactly this.
- Anything quoted without a name: assume nothing until you find the definition. It is always somewhere in the document.