Net yield
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Net yield term is widely used in finance or economy field to present the return (expressed in percentages) from an asset for a given period of time taking into account all the cost. According to Webster, it is represented as a net return divided the cost of purchase of an asset [1]. It shows how profitable the assets is after substation all the cost associated with an asset (fees, interest expenses, etc.). Mainly it is applied to calculate the released profit.
Net yield is a useful tool when it comes to a comparison of different assets from the perspective of profitability. Regardless of differences in the cost of two assets, yield value helps to understand which asset is more profitable[2].
Net yield commonly used in assessing the bond profitability and its investment attractiveness.
Net yield variations
1) Bond Net Yield
Depending on how frequently the bond issue pays out the dividend, Net bond yield differs. A common period for calculating bond yield is one year.
For example, if the is a corporate bond paying 5%(coupon) annually with a face value of $100 purchase for $90 and after 1 year it is sold for $100. A tax rate is 10%. Then the following formula to be applied for calculating net yield.
Failed to parse (syntax error): {\displaystyle \mbox{Bond Net yield} = \dfrac{(-\mbox{Purchase Cash outflow} + \mbox{Sell cash inflow} + \mbox{annual dividend} – \mbox{tax paid})}{\mbox{Cost of purchase}} = } Failed to parse (syntax error): {\displaystyle = \dfrac{(-\$100 + 5\%\cdot\$100 + $100 – 10\%\cdot(5\%\cdot\$100)}{\$100} = \dfrac{(\$5 - \$0.5)}{\$100} = 0.045 \mbox{ or } 4.5\% }
However, if the bond issuer pays coupon semi-annually of quarterly, then the sum of all the coupons for a given period should be used in calculations.
2) Stock Net Yield
A stock calculation is very similar to bond net yield calculation with the only difference that the stock issuer isn't paying dividends on a regular basis. All other parts in the equations stay unchanged.
Assuming, you purchased 1 stock for $1000 in the beginning of the period and sold for $1500 without getting any extra cash from the stock issuer you net dividend will be as following(taking into account 10% tax rate on profit):
Failed to parse (syntax error): {\displaystyle \mbox{Stock Net Yield} = \dfrac{(\mbox{Cash flow from sale & purchase} – \mbox{Tax paid})}{\mbox{Cost of purchase}} = \dfrac{(\$500 – 10\% \cdot \$1500)}{\$1000} = \dfrac{\$350}{\$1000} = 35\%}
Other applications of Net Yield
Besides common usage of net yield in comparing the profitability of the bond, the net yield calculations also applied to evaluate any other kind of investment(e.g. stock, credit derivatives, FX derivative, other structured financial market products) as well as firm's investments into a new project[3].
The formula is sufficient to make a quick project assessment and evaluate the project attractiveness from the investment standpoint.
Similar measurements
There are various other financial measurements which can be used as an addition to the net yield calculations or as standalone self-sufficient computations. The most commonly used formulas are a return on investment(ROI), break-even analysis, total return, Return of equity(ROE).
Footnotes
References
- Atkinson, R. and Ezell, S. (2012) Innovation Economics: The Race for Global Advantage. Yale University Press.
- Chiou Wei, S. and Zhu, Z. (2006). Commodity convenience yield and risk premium determination: The case of the U.S. natural gas market. Energy Economics, 28(4), pp.523-534.
- Duffie, D. and Kan, R. (1996). A yield-factor model of interest rates. Mathematical Finance, 6(4), pp.379-406.
- Richardson, G. (2003). Economic theory. London: Routledge.
- Stretton, H. (1999). Economics. [London]: [Pluto Press].
- Webster, T. (2015). Managerial economics.
- Wree, P., Sauer, J. and Wimmer, S. (2018). Economic Evaluation of Yield-Increasing Wheat Seeds Using a Distance Function Approach. Agricultural and Resource Economics Review, 47(3), pp.610-633.
Author: Mariia Gordiyenko
