Yields: Conventional Yield Measures

Navigating Bond Investments: A Simplified Guide to Key Yield Measures

Understanding how bonds work can be a bit like decoding a financial puzzle. Among the tools in this toolkit are various yield measures, which help you assess how good of a deal your bond investment is. Let's break down some of these key measures without diving too deep into the financial jargon.

1. Current Yield:

This is like checking the instant return on your investment. If you paid $1000 for a bond and it's handing you $50 every year, your 'Current Yield' is 5%.

2. Yield to Maturity (YTM):

Think of this as the average annual return you'd get if you stuck with the bond until it completes its payment promises. It considers all the payments and how much you initially paid for the bond.

3. Yield to Call (YTC):

Sometimes, bonds can be called back early. 'Yield to Call' helps you figure out the average annual return if the bond issuer decides to stop the deal before it's supposed to end.

4. Yield to Put (YTP):

If you have the option to sell the bond back before it's due, 'Yield to Put' helps you calculate the average return if you decide to cash out early.

5. Cash Flow Yield:

This measure looks at all the cash you're getting, not just the regular payments but also any extra money if you sell the bond early.

6. Yield for a Portfolio:

For those with a mix of different bonds, 'Yield for a Portfolio' helps calculate the average return for all of them.

Understanding these measures is like having a compass in the bond investment world. They help you decide if your bonds are giving you good value for your money. It's about looking at different perspectives to make informed decisions about your investments.

This article takes inspiration from a lesson found in FIN 4243 at the University of Florida.