Yield

A ratio between income and price. The forms differ by instrument and the differences matter. A bond's current or running yield is its annual coupon divided by its market price. Its yield to maturity is the fuller measure, the single discount rate at which the present value of every remaining payment equals the price, so it also carries the gain or loss between that price and the amount repaid at maturity. A share's dividend yield is the dividends declared over twelve months divided by the share price. A fund's distribution yield is the distributions it has paid over twelve months divided by its price or its net asset value.

In every one of those forms the denominator is a market price, which is what gives yield its behaviour. Where the income is fixed by contract, as a coupon is, the yield and the price are two expressions of one number and always move in opposite directions, which is why a report that yields rose across a bond market is describing a fall in that market. Where the income is not fixed, as a dividend is not, the numerator can move too, so a dividend yield can rise because the price fell or fall because the payment was reduced, and the figure alone does not say which happened.

The largest misreading is treating a yield as a return. It is not, and in two distinct ways. Total return also includes the change in the price, so a security bought on a high yield and sold at a lower price can return less than the yield suggested. And a quoted yield to maturity is a calculation resting on assumptions that frequently do not hold, namely that the security is held all the way to maturity and that each coupon is reinvested at that same rate for the remaining life. A high yield also usually prices something rather than simply offering something, whether credit risk, the price sensitivity that comes with a long maturity, or a market expectation that a dividend will be cut. Practitioners disagree about whether a trailing dividend yield, which is a fact about payments already made, or a forward yield, which is a forecast, is the more honest figure to quote, and both are published side by side.