What Is Gross Yield?
Let me tell you directly: gross yield is the return on your investment before you subtract taxes and expenses. You express it as a percentage, calculated by taking the annual return—again, before taxes and expenses—and dividing it by the current price of the investment.
Key Takeaways
Understand this: gross yield gives you the overall return on an investment without pulling out taxes and expenses. You can use it to compare relative returns across different investments, such as bonds, mutual funds, and rental properties. Remember, net yield is what you actually get as the real return after those deductions.
How Gross Yield Works
Gross yield serves as a measurement for various investments, including real estate, fixed-income securities, and mutual funds. But keep in mind, it's just one way to gauge return. For something like rental property, the gap between gross and net yields can be substantial because operating expenses—think maintenance, insurance, and property taxes—can eat away at the income significantly.
If you're investing in mutual funds, pay close attention to the difference between gross and net yields. This ensures that management fees and brokerage fees aren't devouring a large portion of your actual returns.
Types of Yields
You should know about common types of yields, which include nominal yield, current yield, and yield-to-maturity (YTM).
Nominal Yield
Nominal yield is straightforward: it's the coupon rate on a bond divided by its par value. This is the interest rate the bond issuer promises to pay you as the purchaser. It's fixed and stays the same for the bond's entire life. You might also hear it called the nominal rate, coupon yield, or coupon rate.
Current Yield
Current yield equals the bond's annual earnings or dividends divided by its current market price. It shows the return you'd expect if you bought the bond and held it for a full year.
Yield-to-Maturity (YTM)
Yield-to-maturity is a bit more involved. This is the total return a bond is expected to provide if you hold it until it matures. Expressed as an annual rate for long-term bonds, it's essentially the internal rate of return (IRR) assuming you hold the bond to maturity and all payments come as scheduled. It's also known as book yield or redemption yield.
Mutual Fund Yields
For mutual funds, yields come in two forms: dividend yield and SEC yield. Dividend yields are an annual percentage based on the fund's portfolio income, calculated from the net income after paying the fund's expenses.
The SEC yield follows requirements from the Securities and Exchange Commission, based on yields from specific companies. It assumes all associated securities are held until maturity.
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