A:

## Return versus Yield

Return is the financial gain or loss on an investment and is typically expressed as the change in dollar value of an investment over time.

Return also referred to as "total return," expresses what an investor earned on an investment during a certain time period in the past. It includes interest, dividends, and capital gain (such as an increase in the share price). In other words, a return is retrospective, or backward-looking and describes what an investment earned over a period.

For example, if you bought a stock for \$50 and sold it at \$60, your return would be \$10 for the investment. If the company paid a dividend of \$1 during the time you held the stock, your total return would be \$11 including the capital gain and dividend. A positive return is a profit on an investment, and a negative return is a loss on an investment.

Yield is the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value, or face value. Yields may be considered known or anticipated depending on the security in question as certain securities may experience fluctuations in value.

Yield is forward-looking. Furthermore, it measures the income, such as interest and dividends, that an investment earns and ignores capital gains. This income is taken in the context of a specific time period and then annualized, with the assumption that the interest or dividends will continue to be received at the same rate.

Bond yields can have multiple yield options depending on the exact nature of the investment. The coupon is the bond interest rate fixed at issuance, and the coupon rate is the yield paid by a fixed-income security. The coupon rate is the annual coupon payments paid by the issuer relative to the bond's face or par value.

The current yield is the bond interest rate as a percentage of the current price of the bond. The yield to maturity is an estimate of what an investor will receive if the bond is held to its maturity date.

## Risk and Yield

Risk is an important component of the yield paid on an investment. The higher the risk, the higher the associated yield potential. Some investments are less risky than others. For example, U.S. Treasuries carry less risk than stocks. Since stocks are considered to carry a higher risk than bonds, stocks typically have a higher yield potential to compensate investors for the added risk.

## What's the difference between Rate of Return and Yield?

Rate of return and yield describe the performance of investments over a set period of time (typically one year), but they have subtle and sometimes important differences. The rate of return is a specific way of expressing the total return on an investment that shows the percentage increase over the initial investment cost. Yield shows how much income has been returned from an investment based on initial cost, but it does not include capital gains in its calculation.

Rate of return can be applied to nearly any investment, while yield is somewhat more limited because not all investments produce interest or dividends. Mutual funds, stocks, and bonds are three common types of securities that have both rates of return and yields.

The formula for rate of return is:

[(Current price - Original price) / Original price] x 100

In our earlier example, you bought a stock for \$50 and sold it at \$60, your return would be \$10 for the investment. With the dividend of \$1 during the time you held the stock, your total return was \$11 including the capital gain and dividend. Your rate of return is:

(\$60 (current price) +\$1 (dividend) - \$50 (original price)) / \$50 = .22 * 100 = 22% rate of return

Consider a mutual fund, for example. Its rate of return can be calculated by taking the total interest and dividends paid and combining them with the current share price, then dividing that figure by the initial investment cost. The yield would refer to the interest and dividend income earned on the fund, but not the increase (or decrease) in share price.

There are several different types of yield for each bond: coupon ratecurrent yield, and yield to maturity. Yield can also be less precise than rate of return, since it is often forward-looking, where rate of return is backward-looking. Many types of annual yields are based on future assumptions that current income will continue to be earned at the same rate.

To learn more about yield, check out the Bond Basics Tutorial.

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