DEFINITION of 'Breakeven Yield'

The breakeven yield is the yield required to cover the cost of marketing a banking product or service. Breakeven yield is the point at which the money, which the sale of a product or service brings in, is equal to the cost of marketing the product or service.

A financial institution realizes no profit or loss at the breakeven point.

BREAKING DOWN 'Breakeven Yield'

The breakeven yield allows a decision-maker to have knowledge about the minimum volume required to earn a specific rate of return on a product or service.

Examples of products and services for individuals and small businesses in commercial banking include: deposits, checking accounts, loans for business, personal and mortgage uses, and certificates of deposit (CDs) and savings accounts.

Commercial banks generate money by realizing a spread between the interest they pay on deposits and the interest they earns on loans. This is known as net interest income. To be more specific: customer deposits into checking, savings, and money market accounts and CDs provide banks with the capital to make loans. Providing loans allows the institutions to earn interest income from those loans. Types of loans can include mortgages, auto loans, business loans and personal loans. The interest rate paid by the bank on money they borrow is less than the rate charged on money they lend, which yields a profit.

Breakeven Yield and Additional Common Yield Calculations

Outside of bank profitability, specific yield calculations are common when determining bond values.

Investors will often see the term yield in the context of:

Nominal Yield

A nominal yield is a bond’s coupon rate and the interest rate (to par value) that the issuer of the bond promises to pay bond purchasers. The nominal yield is fixed and applies for the entire life of the bond. The nominal yield can also be referred to as nominal rate, coupon yield or coupon rate.

Current Yield

Slightly more complex, the current yield is the annual income of an investment (in the form of interest or dividends) divided by the security’s current price. It can be represented as follows:

Current yield = Annual Cash Inflows/Market Price

Current yield is not the actual return an investor receives if he holds a bond until maturity. Instead, it represents the return an investor would expect if the owner purchased the bond and held it for a year.

Yield to Maturity

Yield to Maturity (or YTM) is a total return calculation (a long term bond yield), expressed as an annual rate.

RELATED TERMS
  1. Yield

    Yield is the return a company gives back to investors for investing ...
  2. Nominal Yield

    The nominal yield is the interest rate that the bond issuer promises ...
  3. Current Yield

    Current yield is the annual income (interest or dividends) divided ...
  4. Money Market Yield

    The money market yield is the interest rate earned by investing ...
  5. Yield On Cost (YOC)

    Yield on Cost (YOC) is the annual dividend rate of a security ...
  6. Yield Spread

    A yield spread is the difference between yields on differing ...
Related Articles
  1. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  2. Investing

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  3. Managing Wealth

    How Bond Prices and Yields Work

    Understanding bond prices and yields can help any investor in any market.
  4. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  5. Financial Advisor

    Strong Bond ETFs In A Bond-Eroding Economy

    The ETF boom has given the average retail investor the ability to add some alternative bond types to a portfolio.
  6. Investing

    Understanding Treasury Yield And Interest Rates

    By understanding the factors that influence treasury yield and interest rates, you can learn to anticipate their movement and profit from it.
  7. Investing

    The Highest Yield ETFs

    Yields are rising, and these ETFs are leaders in their field.
  8. Investing

    5 Popular High Yield ETFs in 2016 (HYG, JNK)

    Discover the five most popular high-yield ETFs for 2016, as measured by assets under management, and the differences that set them apart.
  9. Investing

    The Top 5 High Yield Bond Funds for 2019

    Mutual funds and ETFs that invest in high-yield bonds yield greater returns than government securities, yet additional and often significant risk.
RELATED FAQS
  1. Current yield vs yield to maturity

    Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ... Read Answer >>
  2. How do I use the holding period return yield to evaluate my bond portfolio?

    Find out how to use the holding period return yield formula to evaluate the performance of bonds in your portfolio, and view ... Read Answer >>
  3. How do I calculate yield to maturity of a zero-coupon bond?

    Find out how to calculate the yield to maturity of a zero-coupon bond, and learn why this calculation is simpler than one ... Read Answer >>
Trading Center