What is Yield in Finance

• Yield tells you the return on an investment, usually as a percentage.
• It can apply to bonds, stocks (dividends), or savings products.
• Yield is different from just "interest rate" — it's based on what you actually earn compared to what you invested.
• The yield curve shows how yields change depending on the maturity (time until repayment) of bonds.
• Higher yields often mean higher risk, but also higher potential reward.

So what is yield in finance? When you hear the word yield in finance, think profit compared to the money you put in.

In simple words:

Yield = your earnings / your investment

So if you invest $1,000 in a bond, and it pays you $50 in interest over the year, the yield is 5%.

The yield curve is basically a graph that shows how bond yields change depending on their maturity — for example, 1-year, 5-year, or 10-year bonds. In most cases, longer-term bonds pay higher yields, since investors want extra compensation for locking up their money for more time. This is known as a normal yield curve.

Sometimes, though, the curve flips and short-term bonds pay more than long-term ones. This inverted yield curve is often taken as a warning sign that the economy might be slowing down.

So now that we know what is a yield in finance, let's talk numbers! The most basic yield formula looks like this:

Yield = (Income / Investment) × 100%

where:

• Income — What you earn from the investment (like interest, dividends, etc.); and
• Investment — How much money you put in.

For bonds, you might often see this formula:

Current yield = (Annual coupon payment / Current market price) × 100%

This is why the same bond can have different yields depending on whether its price goes up or down in the market.

Let's practice calculating yield on an example. We're assuming that you buy a bond for $1,000 that pays $60 in coupons every year, so:

• Income = $60
• Investment = $1,000

So the yield is:

$60 / $1,000 = 0.06 = 6%

But if the bond price drops to $900, but it still pays $60, the yield's better:

$60 / $900 = 6.67%

So this is how to calculate yield and an explanation why yields move opposite to prices — when bond prices fall, yields rise, and vice versa.

These two terms often get mixed up, but they're not the same.

• Interest rate — Fixed rate set by the issuer; while
• Yield — What you actually earn based on what you paid for it.

That's the exact reason why investors care about yield vs. interest rate. Yield is the real-world number.

Both yield and APY 🇺🇸 (annual percentage yield) talk about returns, but they're used in slightly different contexts. Yield is a general term for the return on an investment, while APY is specifically about savings products and includes the effect of compounding.

Yield in finance simply measures how much you earn compared to how much you invested. The yield curve adds another layer, showing how returns change over different time horizons, often giving hints about the broader economy.