Running Yield

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

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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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