Running Yield

Running Yield Yield Investment Income Market Price Financial Metrics Bonds Dividends Fixed Income
Running yield, often referred to simply as yield, is a financial metric used to measure the annual income generated by an investment relative to its current market price.
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Definition of Running Yield

Running yield, also commonly known as “current yield,” is a measure of the income (interest or dividends) received from an investment, such as a bond or a stock, as a percentage of the investment’s current market price. It is used primarily to assess the annual returns an investor can expect to receive from a security based on its present value.

Formula

The formula for calculating running yield is:

\[ \text{Running Yield} = \left( \frac{\text{Annual Income}}{\text{Current Market Price}} \right) \times 100 \]

Examples

  1. Bond Example:

    • Suppose a bond has a face value of $1,000 and pays an annual coupon of $50. If the bond is currently trading at $950, the running yield would be: \[ \text{Running Yield} = \left( \frac{50}{950} \right) \times 100 = 5.26% \]

  2. Dividend-Paying Stock Example:

    • If a stock is currently priced at $200 and pays an annual dividend of $5, the running yield would be: \[ \text{Running Yield} = \left( \frac{5}{200} \right) \times 100 = 2.5% \]

FAQs about Running Yield

Q1: How does running yield differ from yield to maturity (YTM)?

  • A1: Running yield only considers the annual income (interest or dividends) relative to the current price of the investment. Yield to maturity, on the other hand, calculates the total return an investor will receive if a bond is held until it matures, accounting for all coupon payments and the difference between the purchase price and the face value.

Q2: Can running yield be negative?

  • A2: Running yield can be negative if the annual income generated by the investment is negative, which is rare. Most commonly, if an investment produces no income, its running yield is zero.

Q3: What types of investments is running yield most commonly used for?

  • A3: Running yield is most commonly used for fixed income securities like bonds and dividend-paying stocks.

Q4: Why is running yield important for investors?

  • A4: Running yield provides investors with a quick snapshot of the income return they can expect from an investment relative to its current price, helping in the assessment of investment opportunities.

Q5: Does the running yield account for potential price changes in the investment?

  • A5: No, running yield does not consider potential changes in the investment’s price or capital appreciation. It solely focuses on current income versus current price.

1. Yield to Maturity (YTM): The total return anticipated on a bond if it is held until it matures.

2. Dividend Yield: A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

3. Coupon Rate: The annual interest rate paid on a bond, expressed as a percentage of the face value.

Online References

Suggested Books for Further Studies

  • “The Bond Book” by Annette Thau
  • “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman
  • “Dividends Still Don’t Lie” by Kelley Wright

Accounting Basics: “Running Yield” Fundamentals Quiz

### The running yield on an investment focuses on which of the following? - [ ] Total return including capital gains - [x] Annual income relative to current market price - [ ] Income relative to face value - [ ] Fluctuations in market price over time > **Explanation:** Running yield measures the annual income generated by an investment compared to its current market price, not including capital gains or market price fluctuations. ### Which type of investment is most likely to use running yield as a key metric? - [x] Bonds and dividend-paying stocks - [ ] High-growth technology stocks - [ ] Real estate - [ ] Commodities > **Explanation:** Running yield is most commonly used for fixed income securities like bonds or income-generating investments like dividend-paying stocks. ### If a bond with an annual income of $40 is currently priced at $800, what is its running yield? - [x] 5% - [ ] 8% - [ ] 4% - [ ] 10% > **Explanation:** The running yield is calculated as: \\[ \left( \frac{40}{800} \right) \times 100 = 5\% \\] ### How does running yield compare to yield to maturity (YTM)? - [x] Running yield considers only current income relative to price, while YTM includes total return until maturity. - [ ] Running yield and YTM are the same measures. - [ ] YTM is only concerned with the coupon rate. - [ ] Running yield includes taxes and management fees. > **Explanation:** Running yield measures current income against current price only, while YTM accounts for the total return if the security is held to maturity. ### Can running yield be zero? - [x] Yes, if the investment generates no annual income. - [ ] No, it's always positive. - [ ] Yes, if the price and income are equal. - [ ] No, it can only be negative. > **Explanation:** Running yield can be zero if the investment does not generate any income, such as a non-dividend paying stock. ### What variable does the running yield depend on that can fluctuate frequently? - [ ] Coupon rate - [ ] Face value - [x] Current market price - [ ] Maturity date > **Explanation:** Running yield depends on the current market price, which can fluctuate frequently based on market conditions. ### A stock priced at $100 pays an annual dividend of $4. What is its running yield? - [ ] 4.5% - [x] 4% - [ ] 2% - [ ] 3% > **Explanation:** The running yield is calculated as: \\[ \left( \frac{4}{100} \right) \times 100 = 4\% \\] ### What insight does running yield not provide? - [ ] Income generation - [ ] Market price relation - [ ] Annual dividend or interest - [x] Future capital gains > **Explanation:** Running yield does not provide insight into future capital gains; it only measures current income relative to the current market price. ### For a bond with a face value of $1,000 offering an annual coupon of $70, what is the running yield if the bond is trading at par? - [x] 7% - [ ] 10% - [ ] 6% - [ ] 8% > **Explanation:** If the bond is trading at par ($1,000), the running yield is: \\[ \left( \frac{70}{1000} \right) \times 100 = 7\% \\] ### If a company increases its dividend payments, what happens to the running yield assuming the market price stays constant? - [x] Running yield increases - [ ] Running yield decreases - [ ] Running yield stays the same - [ ] Running yield becomes zero > **Explanation:** If dividend payments increase while the market price remains constant, running yield increases because the numerator (annual income) has increased in the running yield formula.

Thank you for diving deep into the concept of running yield! We hope this guide and quiz have enhanced your understanding and equipped you with the knowledge to better assess your financial investments.

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Tuesday, August 6, 2024
Rural
Running Costs
Current Yield January 1, 1
Point January 1, 1
Yield January 1, 1
Yield to Maturity (YTM) January 1, 1
Average Life January 1, 1
Bond Discount January 1, 1
Capped Floating-Rate Note (Capped FRN) January 1, 1
Closed Period January 1, 1
Debt Security January 1, 1
Dividend Cover January 1, 1

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