Realized Yield
Realized yield is the actual return earned during the holding period for an investment. It may include dividends, interest payments, and other cash distributions. The term "realized yield" can be applied to a bond sold before its maturity date or a dividend-paying security. Generally speaking, the realized yield on bonds includes the coupon payments received during the holding period, plus or minus the change in the value of the original investment, calculated on an annual basis.
Realized Yield
Definition
Realized yield refers to the actual return earned by an investor during the holding period of an investment. This return may include dividends, interest payments, and other cash distributions. The term 'realized yield' is often used to describe the yield of bonds sold before maturity or dividend-paying securities. For bonds, realized yield includes the coupon payments received during the holding period, plus or minus the change in the original investment value, calculated on an annual basis.
Origin
The concept of realized yield originated with the development of financial markets, particularly the bond market. As investors became more focused on actual returns, this concept gained widespread use. Key milestones include the standardization of financial markets in the early 20th century and the development of modern investment theory.
Categories and Characteristics
Realized yield can be categorized as follows:
- Bond Realized Yield: Includes coupon payments and capital gains or losses.
- Stock Realized Yield: Includes dividend payments and changes in stock price.
Characteristics:
- Reflects actual returns rather than expected returns.
- Considers all cash flows during the holding period.
- Calculated on an annual basis, facilitating comparison across different investments.
Case Studies
Case 1: Suppose an investor buys a bond with a face value of $1000 and a coupon rate of 5%, holds it for two years, and sells it for $1100. During the holding period, the investor receives $50 in coupon payments each year. The realized yield is calculated as follows:
Realized Yield = [(50 + 50 + (1100 - 1000)) / 1000] / 2 = 10%
Case 2: An investor buys a stock at an initial price of $50, holds it for three years, and sells it for $70. During the holding period, the investor receives $2 in dividends each year. The realized yield is calculated as follows:
Realized Yield = [(2 + 2 + 2 + (70 - 50)) / 50] / 3 = 16%
Common Questions
Q1: How does realized yield differ from expected yield?
A1: Realized yield is the actual return earned, while expected yield is the estimated return before the investment.
Q2: Does realized yield account for inflation?
A2: Realized yield typically does not account for inflation; investors need to adjust for it themselves.
