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:
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.
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.