How to compute yield?

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How to compute yield?
Yield i.e. probably the profit made on an investment is computed using simple mathematics. Yield for a given term is computed by dividing the initial investment amount with the rate of interest. Total yield from an investment is however computed taking into account term of the investment if compounding of interest is not done.

Total yield= Annual Yield * Investment term

Else, in case of compounding of the interest amount, initial amount has to be re-adjusted every time the compounding is done.

Computation of yield on different investment instruments : Yield for different instruments, including yield from deposits, bond or stocks is calculated differently.

Yield on FD

Annualized effective yield for the FD is calculated by dividing the total return from an investment by the number of years of investment. For instance, if the return generated from an FD investment is say Rs. 3000 and the no. of invested year is 3 years, then the yield in amount terms is Rs 1000 and in percentage terms is 10%.

Yield is determined through basic math. Take your initial investment, and simply divide it by the interest rate. This will give your basic term yield. Whether a term is 6 months, a year, or 12 years, you multiply your annual yield into the number of terms you'll be allowing the investment to sit (if you're not compounding), and you will derive your total yield.

Dividend Yield in case of Stocks/ Shares

Yield from investment into shares is determined through dividend yield.

Dividend Yield= (Amount of dividend received annually/ Stock price) * 100

For instance, if an A company declares Rs 50 as dividend annually for a stock that quotes at say Rs 400, the dividend yield would be 12.5%. And in a case when the stock price plummets to Rs. 250, dividend yield would increase to 20%.

Yield on bonds

Yield or the return realized by investing into bonds is slightly difficult to comprehend. The bond yield shares an inverse relationship with bond price and it is generally the movement in the bond price that is a bit confusing.
Yield = Coupon Amount/ Price ;

where coupon amount is the periodic interest offered between the issue date and maturity date

and price is the price at which the bond quotes

Simple ex: In case a bond with a coupon rate of 10% is purchased at its par value of say Rs. 1000, coupon on it comes out to be Rs 100 and the yield would then be (100/1000) * 100 = 10%.
However, in case the bond price decreases to Rs. 800, you'll receive the same coupon amount which then increase your yield to 12.5% as you realize same interest despite decline in the market worth of the bond. So,decrease in bond price increases bond yield and vice-versa.

Read more about: yield, roi, bonds, stock, deposit, profit
Story first published: Tuesday, September 17, 2013, 11:34 [IST]
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