Investment Glossary

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Yield

the percentage return on an investment, usually the income component. A given investment can have a wide variety of yields because of the many methods used to measure yield. For example a bond's yield may be stated in terms of its returns if held to maturity (yield to maturity). This factors in both the interest received from coupon payments and the market price relative to the final face value payment.

Yield basis

a method of quoting a bond's price in terms of its yield-to-maturity rather than in terms of its dollar value. Since bonds are bought and sold on the basis of yield, yield is generally a more informative measure of value than a bond's dollar price is. Government securities are normally auctioned on a yield basis.

Yield curve

at any particular time, the relation between bond yields or interest rates generally, and maturity lengths. The yield curve normally has a positive slope because yields on long-term bonds generally exceed yields on short-term bonds. The shape of a yield curve is influenced by a number of factors including the relative riskiness between long-term and short-term securities and by investors' expectations as to the level of future interest rates. - Also called term structure of interest rates.

Yield spread

the difference in yield, at a given time, between two bonds or between different segments of the bond market or between similar bonds in different countries. For example, the yield spread between AAA rated bonds and A rated bonds may be ½ of 1% (50 basis points) at a particular time. Likewise, the yield spread between long-term taxable and nontaxable bonds may be 2% (200 basis points). Yield spread may be caused by any of various factors including maturity difference and risk difference.

Yield to maturity (YTM)

the annual return on a bond held to maturity when coupon interest payments and price are considered. When a bond sells at par, the yield to maturity is the same as the coupon interest rate because price appreciation or depreciation is zero if the security is held to maturity. Bond quotations are generally on a yield-to-maturity basis although an investor selling a bond before maturity may earn a yield different from the yield to maturity as calculated at the time the security was purchased. - See also Internal Rate of Return

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