Table of Contents
SERIES 65 | FINANCIAL REGULATION COURSES
Yield is the income return on an investment — expressed as an annual percentage of the investment's current market price or its original cost — representing the cash generated by the investment through interest payments, dividends, or distributions relative to the price paid or the current market value, and serving as the primary income-oriented metric for comparing the relative attractiveness of different fixed income and equity investments on the basis of their current cash generation rather than their total return. Yield is distinguished from total return — which captures both income and capital appreciation — because yield measures only the cash income component of investment performance, making it the foundational measure for income-oriented investors who prioritise current cash generation over capital growth. The term yield encompasses several specific measures — nominal yield, current yield, yield to maturity, yield to call, and yield to worst — each capturing a different dimension of a bond's or stock's income-generating characteristics. Yield in its various forms is tested on the Series 65 examination in the context of fixed income analysis, dividend income measurement, and the comparison among the multiple yield metrics applicable to bond investments.
The nominal yield — also called the coupon rate — is the stated annual interest rate of a bond expressed as a percentage of the bond's face value, fixed at issuance and unchanged throughout the bond's life regardless of what happens to the bond's market price or prevailing interest rates.
A bond with a face value of one thousand dollars and a nominal yield of five percent pays fifty dollars of annual interest — twenty-five dollars every six months — to the bondholder regardless of whether the bond is currently trading at par, at a premium, or at a discount in the secondary market. The nominal yield is the simplest yield measure because it requires no calculation beyond reading the bond's stated coupon rate — but it is also the least analytically useful because it ignores the relationship between the bond's current market price and its income stream.
The nominal yield is always the same as the current yield and the yield to maturity only when the bond is trading at exactly its face value — at par. When the bond trades at a discount the nominal yield is below the current yield which is below the yield to maturity. When the bond trades at a premium the nominal yield is above the current yield which is above the yield to maturity. This three-way relationship among the yield measures is one of the most directly examination-tested fixed income concepts on the Series 65.
The current yield is the annual income generated by a bond or stock expressed as a percentage of its current market price — the most practically useful income yield measure for an investor evaluating the income return available from purchasing the security at today's market price.
Current yield equals the annual income divided by the current market price.
For a bond — current yield equals the annual coupon payment divided by the current market price. A bond with a one thousand dollar face value, a five percent coupon producing fifty dollars of annual interest, currently trading at nine hundred dollars, has a current yield of fifty divided by nine hundred — equalling five point five six percent. The investor who purchases at nine hundred dollars receives fifty dollars of annual income — a current income return of five point five six percent on their nine hundred dollar investment — not the five percent nominal yield based on the face value.
For a stock — current yield equals the annual dividend per share divided by the current stock price. A stock paying a two dollar annual dividend and trading at forty dollars has a dividend yield of two divided by forty — equalling five percent. This is the current yield measure applied to equity securities — commonly called the dividend yield.
The current yield has one critical limitation — it captures only the income component of return and ignores capital appreciation or depreciation. A bond purchased at a discount will appreciate toward par as it approaches maturity, generating a capital gain that supplements the coupon income. A bond purchased at a premium will decline toward par, generating a capital loss that offsets part of the coupon income. The current yield reflects neither of these capital components, making it an incomplete measure of total investment return. The yield to maturity corrects this limitation by incorporating both the income stream and the capital gain or loss into a single comprehensive yield measure.
The dividend yield is the current yield as applied to equity securities — the annual dividend per share divided by the current stock price, expressing the income return available from holding the stock at its current market price.
Dividend yield equals annual dividends per share divided by current stock price.
The dividend yield is the primary income metric for equity investors — particularly for income-oriented investors including retirees who seek current cash distributions from their equity holdings. The comparison between a stock's dividend yield and the yield on fixed income alternatives — Treasury bonds, corporate bonds, and money market funds — is a foundational valuation and allocation tool for investment advisers managing income-oriented portfolios.
When Treasury yields are low — as they were from 2010 through 2021 — high-dividend stocks with yields of three to four percent appear attractive relative to Treasury alternatives yielding under one percent, driving capital flows into dividend-paying sectors including utilities, REITs, and consumer staples. When Treasury yields rise to four or five percent — as they did in 2022 and 2023 — the relative attractiveness of dividend yields over Treasury yields diminishes, reducing the valuation premium that high-dividend stocks command and causing capital to flow from equities to fixed income.
The relationship among nominal yield, current yield, and yield to maturity when a bond trades at a premium, at par, or at a discount is among the most directly and consistently tested fixed income concepts on the Series 65 examination.
When a bond trades at par — market price equals face value — all three yield measures are equal. Nominal yield equals current yield equals yield to maturity.
When a bond trades at a discount — market price below face value — the current yield exceeds the nominal yield because the same dollar coupon is divided by a smaller purchase price. The yield to maturity exceeds the current yield because the investor also captures a capital gain — the bond purchased at a discount will appreciate to par at maturity — adding to the current yield. Therefore — nominal yield is less than current yield which is less than yield to maturity.
When a bond trades at a premium — market price above face value — the current yield is below the nominal yield because the same dollar coupon is divided by a larger purchase price. The yield to maturity is below the current yield because the investor suffers a capital loss — the bond purchased at a premium will decline to par at maturity — subtracting from the current yield. Therefore — nominal yield is greater than current yield which is greater than yield to maturity.
This three-way relationship must be committed to memory in both directions — at a discount all yields rise above the nominal with YTM highest, at a premium all yields fall below the nominal with YTM lowest.
Yield is tested on the Series 65 examination as the foundational income measurement concept underlying all bond analysis and equity income comparison.
The key points to retain are these.
Yield is annual income expressed as a percentage of price — distinguishing income return from total return which also includes capital appreciation. Nominal yield — the coupon rate — is fixed at issuance as a percentage of face value — it never changes regardless of market price movements. Current yield equals annual income divided by current market price — capturing the income return available to an investor purchasing at today's price — applicable to both bonds and stocks — for stocks called the dividend yield. The critical three-way relationship — at par all three yields are equal — at a discount nominal yield is less than current yield which is less than yield to maturity — at a premium nominal yield is greater than current yield which is greater than yield to maturity.
