The main difference between yields and interest rates is that each term refers to different financial instruments. Yield commonly refers to the dividend, interest or return the investor receives from a security like a stock or bond, and is usually reported as an annual figure.

Interest rate generally refers to the interest charged by a lender such as a bank on a loan, and is typically expressed as an annual percentage rate (APR).

### A Yield Example

For example, if PepsiCo (NYSE: PEP) pays a quarterly dividend of 50 cents and the stock price is $50, then the annual dividend yield would be 4% [(50 cents x 4 quarters) / ($50)]. Therefore, the current yield is 4%.

If the stock price increases to $100 and the dividend remains the same, then the yield becomes 2%. (Bond yield is a bit more complex; if you want to learn about it, take a look at our tutorial: *Bond Basics: Yield, Price And Other Confusion*.)

### An Interest Rate Example

As an example of interest rates, suppose you go into your bank to borrow $1,000 for a new bicycle, and the bank quotes you a 5% interest rate on your loan. If you borrow this amount for one year, the interest you would pay on top of paying back the $1,000 would be $50 (simple interest: $1000 x 0.05).

If the interest rate is compounded, the interest rate you will pay would be a little bit more. Lenders charge interest to compensate for the opportunity cost of not being able to invest it somewhere else. (To learn more about compound interest, see *Accelerating Returns With Continuous Compounding*.)