Yield Calculations Cheat Sheet
Bond Yield Formulas
| Yield Measure | Formula | When to Use |
|---|---|---|
| Coupon Rate | Annual Coupon ÷ Face Value | Fixed at issuance — not a market return measure, just the stated rate |
| Current Yield | Annual Coupon ÷ Current Market Price | Quick income snapshot; ignores capital gains/losses and time value |
| Yield to Maturity (YTM) | Solve for r: P = C × [1−(1+r)⁻ⁿ]/r + FV/(1+r)ⁿ | Standard bond yield — total return if held to maturity with reinvestment |
| Yield to Call (YTC) | Same as YTM but n = periods to call, FV = call price | Return if a callable bond is redeemed early |
| Yield to Worst (YTW) | min(YTM, all YTCs) | Most conservative yield — what you should use for risk analysis |
| Bond Equivalent Yield (BEY) | 2 × [(FV − P) / P] × (365 / Days to Maturity) ÷ 2 | Converts any yield to semiannual bond basis for comparison |
| Discount Yield | [(FV − P) / FV] × (360 / Days to Maturity) | Used for T-Bills and money market instruments |
| Tax-Equivalent Yield | Municipal Yield ÷ (1 − Marginal Tax Rate) | Compares tax-exempt muni bonds to taxable bonds on equal footing |
Equity Yield Formulas
| Yield Measure | Formula | When to Use |
|---|---|---|
| Dividend Yield | Annual Dividend per Share ÷ Current Share Price | Income return from holding a stock; does not include capital gains |
| Forward Dividend Yield | Expected Next 12-Month Dividends ÷ Current Price | More relevant than trailing yield when dividends are growing |
| Earnings Yield | EPS ÷ Share Price (inverse of P/E) | Lets you compare stock returns to bond yields directly |
| Free Cash Flow Yield | FCF per Share ÷ Share Price | Cash-based return measure — better than earnings yield for capital-intensive firms |
| Shareholder Yield | (Dividends + Net Buybacks + Debt Paydown) ÷ Market Cap | Total capital return to shareholders; captures buybacks that dividend yield misses |
Real Estate Yield Formulas
| Yield Measure | Formula | When to Use |
|---|---|---|
| Cap Rate | Net Operating Income ÷ Property Value | The property-level yield — compare across similar properties and markets |
| Cash-on-Cash Return | Annual Pre-Tax Cash Flow ÷ Total Cash Invested | Return on the actual equity invested — accounts for leverage |
| Gross Rent Multiplier | Property Price ÷ Annual Gross Rental Income | Quick screening metric — lower is generally better |
| REIT Dividend Yield | Annual REIT Dividend ÷ Share Price | Income return from REIT shares — compare using the REIT metrics cheat sheet |
Yield Spread Calculations
| Spread Type | Calculation | What It Measures |
|---|---|---|
| Nominal Spread | Bond YTM − Treasury YTM (same maturity) | Extra yield over the risk-free rate for taking credit risk |
| Z-Spread (Zero-Volatility) | Constant spread added to each spot rate to match bond price | More precise than nominal spread; accounts for the full yield curve shape |
| OAS (Option-Adjusted Spread) | Z-Spread − Option Cost | Isolates credit spread by removing the value of embedded options |
| Credit Spread | Corporate Bond Yield − Government Bond Yield | Market’s assessment of default risk for a given issuer or rating category |
| TED Spread | 3-Month LIBOR − 3-Month T-Bill | Indicator of interbank credit stress; widens during financial crises |
Real Yield and Inflation Adjustments
| Concept | Formula | Why It Matters |
|---|---|---|
| Real Yield (Fisher Equation) | (1 + Nominal Yield) / (1 + Inflation Rate) − 1 | Your actual purchasing power return after inflation |
| Real Yield (Approximation) | Nominal Yield − Inflation Rate | Quick estimate that works well when rates and inflation are low |
| Breakeven Inflation | Nominal Treasury Yield − TIPS Yield | The market’s implied inflation expectation over the bond’s term |
Key Takeaways
- YTM is the go-to bond yield measure; YTW is the most conservative for risk analysis
- Current yield is a quick snapshot but ignores time value and capital gains
- Earnings yield (inverse P/E) lets you compare stocks vs. bonds directly
- Always calculate real yield to understand returns after inflation
- Yield spreads measure how much extra return the market demands for taking risk
Frequently Asked Questions
What is the difference between current yield and yield to maturity?
Current yield only measures the annual coupon income relative to the bond’s current price. YTM captures the total return — including coupon income, reinvestment, and the capital gain or loss from the difference between purchase price and par value at maturity. YTM is always the more complete measure.
When should I use tax-equivalent yield?
Use tax-equivalent yield whenever you’re comparing a tax-exempt municipal bond to a taxable bond. A muni yielding 3% is equivalent to a 4.6% taxable yield for someone in the 35% tax bracket. Without this adjustment, you’d systematically undervalue munis in your portfolio.
What is shareholder yield and why does it matter?
Shareholder yield adds dividends, net share buybacks, and debt reduction together to show the total capital being returned to shareholders. Many companies now prefer buybacks over dividends for tax efficiency. A company with a 1.5% dividend yield but 4% buyback yield is actually returning 5.5% to shareholders — far more than the dividend yield alone suggests.
How do I interpret breakeven inflation?
Breakeven inflation is the difference between nominal Treasury yields and TIPS yields for the same maturity. If 10-year breakeven inflation is 2.3%, the market expects inflation to average 2.3% annually over the next decade. If you think inflation will be higher, buy TIPS; if lower, stick with nominal Treasuries.
Why do money market instruments use different yield calculations?
T-Bills and commercial paper are discount instruments — they don’t pay coupons. Their yield is calculated based on the discount from face value. The discount yield convention uses a 360-day year and face value as the denominator, which slightly understates the actual return. Bond equivalent yield corrects for this to enable apples-to-apples comparison with coupon bonds.