There is a lot of talk about bond yield in the news now days, so I wanted to take a minute to talk about yield. We recently talked about interest rates and how low-interest rates meant that borrowing money was cheap, but it also means that you get very low-interest on your savings account.
This rate of return. The amount of money you get paid annually to invest in something is called yield. It is different from capital gains which are speculative in nature. Yield is clearly defined before you invest in something. If I buy a stock and it goes up in price, my profit is a capital gain, not yield. I had no guarantee ahead of time what that profit (or loss) would be.
My regular readers know I am a big fan of dividend paying stocks. The reason is yield. These stocks have a clearly defined dividend yield. They tell me ahead of time how much money they are going to pay me yearly in dividends and based on the current price of the stock, what those payments represent as a percent of my purchase price.
The thing to understand about yield is that it is inversely related to the price of the asset. If the asset price goes up, the yield goes down and vice versa. Because asset price is based on the popularity of the asset, the yield is also inversely related to how many people want to buy that asset. Confused yet?
Let’s say you were a country that issued bonds that cost $100 and paid an annual yield of $3.00. So anyone who bought those bonds would get a 3% yield (rate of return) on those bonds. Now if this country started having financial trouble, fewer people would want to buy those bonds, so the price might fall to $50 but they still pay $3.00 annually, so the yield would jump to 6%.
$100 bond paying a 3% yield = $3.00 annually.
$50 bond paying a 6% yield = $3.00 annually.
The higher a country’s bond yield, the worse that country is doing. The lower the country’s bond yield, the more stable that country is.
Did you know Germany recently sold bonds that had a yield of negative 0.0122 percent? People were so scared of losing their money that they were willing to pay to invest in the relative safety of German bonds!!
The Wall Street Journal: German yields South of zero.
Canadian Performer’s Money: Interest rates.
Here’s a man with a sexy New Zealand accent…