Running Yield, also known as current yield, is a metric used to evaluate the income return on an investment relative to its current market price. It is commonly applied to bonds and other fixed-income securities. Understanding running yield helps investors assess the ongoing return they can expect based on the investment’s present price.
Historical Context
The concept of yield has been a fundamental part of finance for centuries. Yield measures have evolved alongside the development of financial markets, providing crucial information for income-focused investors. The modern running yield metric allows investors to make informed decisions in dynamic market conditions.
Key Events
- Early 1900s: The formalization of bond markets and the importance of yield metrics.
- 1970s: The inflation of the 1970s made yield a critical measure for preserving purchasing power.
- 2008 Financial Crisis: Highlighted the importance of yield measures in assessing bond investments’ risk and return.
Types/Categories
- Running Yield on Bonds: Annual coupon payment divided by current market price.
- Running Yield on Equities: Annual dividends divided by current market price.
Detailed Explanations
Running Yield Formula:
For a bond:
For a stock:
Charts and Diagrams
graph TD
A[Bond Price] --> B[Coupon Payment]
A --> C[Running Yield]
B --> C
Importance and Applicability
- Income Calculation: Helps investors determine the annual income they can expect based on current security prices.
- Investment Comparison: Enables comparison of yields across different securities.
- Market Sentiment: Reflects current market conditions and investor expectations for income securities.
Examples
- Bond Example: A bond with an annual coupon payment of $50 and a current price of $1,000 has a running yield of 5%.
- Stock Example: A stock paying an annual dividend of $2 and trading at $40 has a running yield of 5%.
Considerations
- Market Price Volatility: Running yield can fluctuate with changes in the security’s market price.
- Interest Rate Changes: Affected by prevailing interest rates which influence bond prices.
Related Terms
- Yield to Maturity (YTM): The total return anticipated on a bond if held until maturity.
- Dividend Yield: A financial ratio indicating how much a company pays out in dividends relative to its share price.
- Coupon Rate: The annual coupon payment made by the bond’s issuer relative to the bond’s face or par value.
Comparisons
- Running Yield vs Yield to Maturity: Running yield only considers current income while YTM incorporates total returns including price appreciation/depreciation.
- Running Yield vs Dividend Yield: Similar in calculation but applied to different types of securities.
Interesting Facts
- Running Yield is a snapshot measure and does not account for capital gains or losses.
- In high inflation periods, running yield becomes crucial for maintaining real returns on investments.
Inspirational Stories
Benjamin Graham, known as the father of value investing, often emphasized the importance of understanding and analyzing yields for making informed investment decisions.
Famous Quotes
“An investment in knowledge pays the best interest.” — Benjamin Franklin
Proverbs and Clichés
- “Don’t put all your eggs in one basket.” — Advises diversification to manage risk, crucial in yield investing.
- “A bird in the hand is worth two in the bush.” — Emphasizes the value of current income, akin to running yield.
Expressions, Jargon, and Slang
- “Clipping the coupon”: Earning regular interest income from bonds.
- “Yield chasing”: Investing in higher-yielding securities to increase income.
FAQs
Q: How is running yield different from yield to maturity?
A: Running yield measures annual income based on current prices, while YTM calculates the total return if a bond is held to maturity, including income and capital gains/losses.
Q: Can running yield be negative?
A: No, running yield represents income as a proportion of the current price and cannot be negative. However, the current market price of the security can fluctuate.
References
- “Investments” by Zvi Bodie, Alex Kane, and Alan J. Marcus
- “The Intelligent Investor” by Benjamin Graham
- Financial Industry Regulatory Authority (FINRA) website
Summary
Running Yield is an essential metric for investors focused on income returns relative to the current market price of a security. It provides valuable insight into the ongoing income potential of bonds and stocks, aiding investment comparison and decision-making. While running yield is subject to market price volatility, it remains a crucial measure for income-oriented investing.
By understanding running yield, investors can better navigate market dynamics and optimize their portfolios for steady income streams.
