What Is Running Yield?
Running yield is the annual income on an investment divided by its current market value. Running yield is a calculation that divides the income from dividends (for stocks) or coupons (for bonds) by the market price of the security; the value is expressed as a percentage. "Running" refers to a continuous investment, such as a bond held to maturity.
Running yield is also called current return, current yield, or yield to maturity (YTM) when used in reference to bonds.
- Running yield, often called yield to maturity (YTM) when in reference to bonds, measures the annual rate of return an investment provides.
- It is calculated by determining the annual income from an investment and then dividing it by its current market value.
- Knowing the running yield can give a market participant critical information in which to make buying and selling decisions, as well as a means of comparing the lifetime income yield of different potential investments.
Understanding Running Yield
Running yield is similar to dividend yield, but applies to the investor's entire portfolio, instead of individual assets. A portfolio's running yield identifies the income or return that investors realize from all currently held investments. Investors can use running yield values to compare portfolio performance over time and to determine if the portfolio needs to be changed. Running yield is often calculated on an annual basis; however, certain investors may calculate this value on a more frequent basis. A security's running yield can be used by investors to make buying and selling decisions and to compare the expected lifetime income yield of various securities.
Running Yield and Bonds
Running yield is one of the many ways to calculate the yield of a bond. While the coupon rate of a bond represents the nominal yield which is calculated by dividing the annual coupon payments by the face value of the debt instrument, the running yield uses the current market price of the bond instead of the face value as its denominator. This yield measures the return that an investor will expect if s/he held the bond for one year.
For example, consider an investor that purchases a bond for $965. The bond has a face value of $1,000 with annual coupon payments of $40. The nominal yield on the bond can be calculated as $40/$1000 = 4%. The running yield can be calculated as $40/$965 = 4.15%. If the bond was purchased at par, the nominal and running yield would be the same. A bond that trades at a discount, as in our example above, will have a higher running yield than a bond trading at a premium. Likewise, as the price of the bond increases, the running yield will decrease, and vice versa. The running yield of a bond changes from day to day as the market price changes, and from year to year as the bond approaches maturity. This is because the value of the bond converges towards the face value of the bond as time passes.
Typically, the running yield of a conventional bond is higher than that of a stock. The running yield ignores capital gains, but in addition to dividend income, shareholders also expect to make a capital gain from their equity investments. Since only the dividend income is factored into the running yield calculation, the interest income on the debt will prove to be higher. Even though stocks are expected to have higher returns on investment, this does not necessarily translate to higher dividend yields than current yields, given that some stocks in a portfolio might pay little to no dividends.