9 - Bond yields and benchmark government bonds

Abstract

The concept of yield applies to all securities. It is necessary to distinguish between the debt instrument's nominal yield and real yield. There are various types of yields: (1) dividend yield, which is the current dividend as a percentage of market prices of equity, (2) earnings yield, a theoretical figure based on the last earnings per share, typically applied in conjunction to current market price, and (3) redemption yield that is normally used only in connection to fixed-interest securities. Redemption yield is the interest payment over the remaining life of the debt instrument plus or minus the difference between purchase price and redemption value. In this sense, redemption yield is earnings yield adjusted to take account of capital gain or loss to redemption. With fixed debt instruments, the nominal interest, or coupon, is unlikely to be the same as the actual yield. Interest rates on any investment, including debt instruments, are not constant through time. The yield depends on several factors such as purchase price, nominal interest rate, time to maturity, carry cost of money, and security. All financial instruments have credit risk, though algorithms for yield calculation typically assume that there is no counterparty risk.