{ "id": "63e00bdf-42b9-5c63-8f5c-7fe526943153", "slug": "yield", "term": "Yield", "aliases": [], "category": "Fixed Income", "category_slug": "fixed-income", "difficulty": "basic", "definition": "Yield is the income generated by an investment over a specified period, expressed as a percentage of the investment's cost or current market price. In fixed income, yield most commonly refers to the internal rate of return on a bond's cash flows—coupon payments and principal repayment—at its current market price.", "key_takeaways": [ "Yield and price move inversely: when bond prices fall, yields rise; when prices rise, yields fall.", "Current yield equals annual coupon divided by market price; yield to maturity (YTM) incorporates both coupon income and capital gain/loss to maturity.", "Yield spreads between bonds of different credit quality reflect the credit risk premium demanded by investors.", "Nominal yield differs from real yield; real yield adjusts for inflation (real yield = nominal yield − expected inflation).", "In equities, dividend yield (annual dividends / share price) and earnings yield (EPS / price, the inverse of P/E) are common yield metrics." ], "detailed_explanation": "Yield is among the most fundamental concepts in financial markets, serving as the common unit of comparison across asset classes, maturities, and credit qualities. While the term is applied broadly, its most rigorous and economically significant usage is in fixed income, where yield precisely characterizes the time-adjusted return an investor expects to earn by holding a bond from purchase to maturity—or to any other specified horizon.\n\nThe relationship between yield and price is governed by present value mathematics. A bond's price equals the sum of its future cash flows discounted at the yield: higher yields mean lower discount factors and therefore lower present values (prices). This inverse relationship is the cornerstone of fixed income risk management. When interest rates in the economy rise—driven by central bank policy, inflation expectations, or credit risk reassessment—the discount rate applicable to existing bond cash flows increases, mechanically reducing bond prices. This price sensitivity is measured by duration.\n\nYield can be expressed in several forms depending on the analytical purpose. Current yield (annual coupon / market price) is the simplest measure but ignores time value and the difference between coupon income and total return. Yield to maturity (YTM) is the IRR of all cash flows at the current price and is the standard for comparison across bonds. Yield to call, yield to put, and yield to worst extend this framework to bonds with embedded options. For floating rate instruments, quoted margin or discount margin serves the analogous function, expressing the spread over the reference rate that equates the instrument's price to its future cash flows.\n\nYield spreads are the differences in yield between various bond types. The credit spread—the yield premium of a corporate bond over an equivalent-maturity Treasury—reflects perceived credit risk. High yield (junk bond) spreads typically range from 300–1000+ basis points over Treasuries; investment grade spreads are narrower, typically 50–200 bps. The repo rate (used to finance bond holdings) interacts with yield in carry calculations: a bond's net carry equals its coupon yield minus its financing cost (repo rate)—a critically important metric for leveraged fixed income investors and arbitrageurs.", "example": "Consider a 10-year corporate bond with a face value of $1,000, an annual coupon rate of 5% (paying $50 per year), currently priced at $950 in the secondary market. The current yield is $50 / $950 = 5.26%. The yield to maturity—the discount rate that equates the present value of 10 annual $50 coupon payments plus the $1,000 terminal principal payment to the $950 price—is approximately 5.59%. The additional 33 basis points above current yield reflects the capital gain (from $950 to $1,000) that accretes over the 10-year holding period. If a U.S. Treasury of equivalent 10-year maturity yields 4.25%, the credit spread of this corporate bond is 5.59% − 4.25% = 134 basis points, reflecting the market's assessment of the issuer's default risk and expected recovery.", "formula": "P = \\sum_{t=1}^{n} \\frac{C}{(1+y)^t} + \\frac{FV}{(1+y)^n}", "formula_latex": null, "interactive_type": "calculator", "calculator_id": null, "related_terms": [ "basis", "bond", "callable-bond", "central-bank", "corporate-bond", "coupon-rate", "credit-risk", "credit-spread", "current-yield", "default", "discount-rate", "duration", "face-value", "flat-yield-curve", "inflation" ], "backlinks": [ "accrued-interest", "adr-american-depositary-receipt", "alpha-capture", "asset-backed-security", "bankers-acceptance", "blind-auction", "bond-ladder", "bridge-loan", "bull-spread", "cholesky-decomposition", "commercial-paper", "consumer-price-index", "convexity", "cost-of-debt", "coupon-rate", "crack-spread", "current-yield", "day-count-convention", "defi-decentralized-finance", "deflation", "dirty-price", "dividend-yield", "dutch-auction", "eurodollar", "flash-loan", "forward-rate-agreement", "green-bond", "key-rate-duration", "liquidity-pool", "mean-reversion-bias", "mental-accounting", "modified-duration", "nft-non-fungible-token", "nob-spread", "par-value", "producer-price-index", "pyramiding", "real-assets", "recency-bias", "signal-generation", "social-bond", "staking", "strong-dollar", "timberland-investment", "work-up-protocol", "yield-curve-control", "yield-curve-flattener", "yield-farming" ], "cross_references": [ "basis", "bond", "central-bank", "corporate-bond", "coupon-rate", "credit-risk", "credit-spread", "current-yield", "default", "discount-rate", "duration", "face-value", "inflation", "internal-rate-of-return", "investment-grade", "junk-bond", "margin", "premium", "present-value", "repo" ], "tags": [ "level:basic", "cat:fixed-income" ], "asset_classes": [ "fixed-income" ], "regulators": [], "see_also": [], "sources": [], "wordcount": 645, "checksum": "f1cebe1a5887fac5", "version": "2026.05.03", "license": "CC-BY-4.0", "updated_at": "2026-09-07T02:15:24+00:00", "_links": { "self": "https://hedgefund.wiki/api/v1/terms/yield", "jsonld": "https://hedgefund.wiki/api/v1/terms/yield?format=jsonld", "markdown": "https://hedgefund.wiki/api/v1/terms/yield?format=md", "graph": "https://hedgefund.wiki/api/v1/graph/yield", "category": "https://hedgefund.wiki/api/v1/categories/fixed-income", "schema": "https://hedgefund.wiki/schema/term.schema.json", "html": "https://hedgefund.wiki/#/terms/yield" } }