Bonds, Notes, Bills
The nominal yield or coupon yield is the yearly total of coupons (or interest) paid divided by the Principal (Face) Value of the bond.
The current yield is those same payments divided by the bond's spot market price.
The yield to maturity is the IRR on the bond's cash flows: the purchase price, the coupons received and the principal at maturity.
The yield to call is the IRR on the bond's cash flows, assuming it is called at the first opportunity, instead of being held till maturity.
The yield of a bond is inversely related to its price today: if the price of a bond falls, its yield goes up. Conversely, if interest rates decline (the market yield declines), then the price of the bond should rise (all else being equal).
There is also TIPS (Treasury Inflation Protected Securities), also known as Inflation Linked fixed income. TIPS are sold by the US Treasury and have a "real yield". The bond or note's face value is adjusted upwards with the CPI-U, and a real yield is applied to the adjusted principal to let the investor always outperform the inflation rate and protect purchasing power. However, many economists believe that the CPI under-represents actual inflation. In the event of deflation over the life of this type of fixed income, TIPS still mature at the price at which they were sold (initial face). Losing money on TIPS if bought at the initial auction and held to maturity is not possible even if deflation was long lasting.
Read more about this topic: Yield (finance)
Famous quotes containing the word bills:
“Listen to me. You come into this town, and you think you’re headed somewhere, don’t you? You think you’re gonna get there with a gun, but you’re not. Get me. You know why, ‘cause you got thousand dollar bills pasted right across your eyes. And someday you’re gonna stumble and fall down in the gutter, right where the horses have been standin’, right where you belong.”
—Ben Hecht (1893–1964)