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 (SVG (MathML can be enabled via browser plugin): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\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 (SVG (MathML can be enabled via browser plugin): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\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 (SVG (MathML can be enabled via browser plugin): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\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).
Examples of Net yield
- Net yield of a bond: For example, an investor buys a bond with a face value of $1,000. The bond has a coupon rate of 8%. The investor pays a commission of $50 to purchase the bond. The net yield of the bond for the investor is 7.90%. This is calculated by dividing the coupon rate (8%) minus the commission expense ($50/$1,000) to arrive at the net yield of 7.90%.
- Net yield of a stock: For example, an investor buys a stock with a market price of $50. The investor pays a commission of $10 to purchase the stock. The investor sells the stock at the end of the year at a market price of $60. The net yield of the stock for the investor is 10%. This is calculated by dividing the market gain ($60-$50) minus the commission expense ($10/$50) to arrive at the net yield of 10%.
- Net yield of a mutual fund: For example, an investor invests $1,000 in a mutual fund. The fund has an annual management fee of 1.5%. The investor receives a dividend of $20 from the fund at the end of the year. The net yield of the mutual fund for the investor is 18.50%. This is calculated by dividing the dividend ($20/$1,000) minus the management fee (1.50%) to arrive at the net yield of 18.50%.
Advantages of Net yield
Net yield has several advantages, such as:
- It allows to determine the true return of an asset. It takes into account all costs associated with the asset, such as fees, interest expenses, and taxes, as well as any other costs that might have been incurred during the period. This allows investors to accurately assess the profitability of their investments, as they can be sure that all costs have been accounted for.
- It also allows investors to compare the performance of different assets. Since net yield takes into account all costs associated with an asset, investors can get a better understanding of how different assets are performing. This can be useful for investors who want to diversify their portfolios or who are looking for investments that will generate higher returns.
- It can also help investors make more informed decisions about their investments. By calculating the net yield for an asset, investors can determine whether or not it will be a good fit for their portfolio. This can help investors avoid making risky investments that may not generate the returns they are expecting.
Limitations of Net yield
Net yield is a useful tool for understanding the profitability of an asset, however, it is subject to some limitations. These include:
- Not considering the potential tax implications of the asset – Net yield does not take into account any taxes that may be incurred from the purchase or sale of the asset. This means that the actual return on the investment may be lower than the calculated net yield.
- Not taking into account inflation – Inflation is not taken into account when calculating net yield, which means that the return may be less than anticipated in real terms.
- Not considering the time value of money – Net yield does not take into account the concept of the time value of money, which states that money is worth more the sooner it is received. This means that the return on an investment can be significantly lower if returns are received at a later date.
- Not accounting for other sources of income – Net yield does not take into account other sources of income that may be generated by the asset, such as dividends or capital gains. This means that the return on the investment may be higher or lower than the calculated net yield.
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. There are other approaches related to the net yield which are as follows:
- The Gross Yield approach which calculates the return on an asset before any expenses are taken into account.
- The Yield to Maturity approach, which considers the present value of future cash flows from an investment.
- The Yield to Call approach, which is similar to the yield to maturity approach but takes into account the call option of the issuer.
- The Yield to Worst approach, which is the lowest possible yield that an investor can receive from an investment.
In summary, the net yield is a return on an asset taking into account all expenses, while other approaches such as the gross yield, yield to maturity, yield to call and yield to worst provide different perspectives on the return on an investment.
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
