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. Gross Yield

    The gross yield is the yield on an investment before the deduction ...
  2. Yield

    Yield is the return a company gives back to investors for investing ...
  3. Average Annual Yield

    The average yield on is the sum of all interest, dividends or ...
  4. Yield On Cost (YOC)

    Yield on Cost (YOC) is the annual dividend rate of a security ...
  5. Yield Basis

    The yield basis is a method of quoting the price of a fixed-income ...
  6. Yield Pickup

    Yield pickup is the additional interest rate an investor receives ...
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

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  3. Investing

    Bond yield curve holds predictive powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  4. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  5. Investing

    How Bond Market Pricing Works

    Want to know how bond price are determined? Learn the basic rule of the bond market.
  6. Investing

    Corporate Bonds: An Introduction to Credit Risk

    Understand how corporate bonds often offer higher yields, and discover how it is important to evaluate the risk, including credit risk, that is involved before you buy.
  7. 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.
  8. Investing

    Junk Bonds: A Correction May Be Looming

    Corporate debt issued by companies with riskier balance sheets and lower credit ratings typically carries higher interest rates.
RELATED FAQS
  1. What is the difference between yield and return?

    Return is the financial gain or loss on an investment. Yield measures the income, such as interest and dividends, from an ... Read Answer >>
  2. If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive ...

    See how fixed-income security investors can expect to use coupon rates on semi-annual payments if the bond or debt instrument ... Read Answer >>
  3. How do I calculate yield of an inflation adjusted bond?

    Learn how to calculate the real yield of an inflation-adjusted bond, such as the U.S. Treasury inflation-protected security ... Read Answer >>
  4. What is the difference between yield to maturity and holding period return yield?

    Learn about the differences between a bond's yield to maturity (YTM) and its holding period return, and why bondholders should ... Read Answer >>
  5. How are bond yields affected by monetary policy?

    Learn about how bond yields are affected by monetary policy. Find out how this determines the risk-free rate of return and ... Read Answer >>
Trading Center