What Is 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.
- Breakeven yield is the yield required to cover the cost of marketing a banking product or service.
- It allows decision-makers to have knowledge about the minimum volume required to earn a specific rate of return on product or service.
- Typically, breakeven yields for loan products involve a series of simple calculations.
Understanding 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 earn 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 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 the money they borrow is less than the rate charged on the money they lend, which yields a profit.
Typically, breakeven yields for loan products involve a series of simple calculations. Interest expense is added to noninterest expense and then subtracted from noninterest income and divided by earnings assets.
Breakeven Yield and Additional Common Yield Calculations
Outside of bank profitability, specific yield calculations are common when determining bond values. Investors will often use different versions of yield in the contexts of:
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.
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=Market PriceAnnual Cash Inflows
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. It is the total return anticipated on a bond if the bond were held until it matures. In other words, it is the internal rate of return (IRR) of a bond if the investor holds the bond until maturity, with all payments made as scheduled and reinvested at the same rate.
The formula to calculate YTM of a discount bond thus appears similar to IRR:
YTM=nCurrent PriceFace Value−1where:n=number of years to maturityFace value=bond’s maturity value or par valueCurrent price=the bond’s price today