An inverted yield curve occurs when long-term treasuries have a lower yield than short-term treasuries. Normally, investors would not be interested in a such an arrangement and the yields would have to come up to generate some demand. However, if investor sentiment is bearish enough on bonds, they will seek to avoid the interest rate risk of short-term bonds, which will expire sooner and leave them unable to find a good rate at that point potentially. Investors with that mindset will pile on demand for long-term bonds, which drives the price up and the yields down. Continue reading...
Yield is a term which describes the cash return on a security investment, and does not include appreciation. Yield is the cash paid out of an investment in the form of dividends and interest received. The term does not encompass the appreciation of the investment, and it may be evaluated in different ways for different types of investments, so comparisons of yield across asset types is not standardized or recommended. Continue reading...
APY is an annualization of an interest rate which may be assessed on a different schedule, such as on a monthly basis, and is useful for comparing debt and loan agreements that use different schedules. Annual Percentage Yield is a way to compare products and loans with different interest rates and different schedules for calculating the interest. It is a calculation of the effective annual rate, and it takes into account the effects of compounding interest, which a similar calculation for APR (Annual Percentage Rate) does not do. Continue reading...
The current yield on a bond takes into account its annual interest payment but also the price at which it can be sold. The yield on a bond held to maturity is fairly straightforward. However, if the bond you are holding is trading at a price higher or lower than where you purchased it, the current yield would be different than the yield to maturity. For example, if you purchased a 5% bond at a price of $100, but the current market price was $90, your current yield would be significantly lower than 5%. To calculate, simply divide annual cash inflows by market price. Continue reading...
A yield curve is an illustration of the current duration-to-yield relationship for bonds of the same credit rating but different durations. As a general rule, the longer the duration of the loan, the more risk you take on (since you don't know what might happen with that corporation in the future), and therefore, you demand a higher reward (i.e., higher coupon). The yield curve for any bond (not just the US Treasury Bonds) changes daily based on many economic and market factors. Continue reading...
The payments remaining on an interest-paying bond or instrument, plus principal, are totaled up and then annualized, and this annual rate is the yield to maturity. Yield to maturity is a calculation that helps an investor decide if he or she is getting a good deal. If yield to maturity is greater than the coupon rate, the bond is trading a a discount. If yield to maturity is less than the coupon rate, it is selling at a premium. If they are equal the bond is trading at par value. Continue reading...
A dividend yield is a ratio that represents how much a company pays in annual dividends relative to its share price. A dividend yield is represented as a percentage, and is easily calculated. Simply divide the annual dividends paid per year (dollar value) by the per share price of the stock. Here’s the equation in simple terms: Annual Dividends Per Share / Price Per Share = Dividend Yield A company with a higher dividend yield means they pay out more of their profits to shareholders, but it also means that company may be allocated less of their free capital towards investment, research, and other growth areas. Continue reading...
Bond yield is a measure of the return on investment for bonds, and there several kinds of yield that can be computed. Yield on a bond is the amount of interest that it pays annually, as a percentage of the amount invested — at least, this is the most common type of yield discussed, which is known as Current Yield. If a bond pays quarterly or monthly income to the investor, these payments are totaled up and divided by the amount invested. Continue reading...
There will be a premium paid by investors for the right to establish positions using options. The price of the underlying security must move to a certain point for the options position to become profitable. The strike price of an options contract names the price that an investor can use to buy or sell the underlying security, but the breakeven price will be the strike price plus the amount of the investor’s premium or net debit. Breakeven price can apply to a multi-option strategy such as a spread, or to a single option position. Continue reading...
A strike price names the price of the underlying security in options or derivative contract at which the underlying security will trade at settlement if it is exercised. In a call option, for example, the option would name a strike price, and if the current market price of the underlying security was more than the strike price, an investor who held the call contract would invoke his right to purchase the stock from the issuer/seller of the option at the strike price, which, remember is lower than the prevailing market price in this example, and the investor can turn around and sell it in the market at or near its most recent, and higher, price, for a profit. Continue reading...
For comparisons of the risk/return ratio of an investment, one must start with a benchmark of a risk-free rate of return in the current market. Since U.S. Treasury bills are backed by the full faith, credit, and taxing power of the U.S. Government, they are considered “riskless,” or as close to riskless as we can get. The current yield on a 10-year Treasury note is generally considered the risk-free rate of return. Continue reading...
Bonds can be traded on exchanges before their maturity date, but the price might fluctuate based on the current interest rate environment. As the buyer of, say, a $1,000 bond, you should be aware that as long as the company does not go bankrupt, you will receive $1,000 back at the date of maturity. During the life of the bond, however, the price at which you can sell that bond might oscillate depending on the interest rate environment and the perceived financial health of the company. Continue reading...
Adaptive Price Zone is a volatility-based trading indicator. Similar to traditional Bollinger Bands, Adaptive Price Zone is a recent development by Lee Leibfarth that overlays two indicator bands around a moving average line. It is more adaptive than many previous band indicators, using several short-term exponential moving averages which are double-smoothed and closely hug changes in volatility and price data. Exponential moving averages give more weight to recent data, which helps the lines hug current data. Continue reading...
Option prices are decided by the buyers and sellers in the marketplace, but are tied closely to the amount of risk inherent in the agreed upon expiration date and strike price. Option prices change as the market factors in the relevant information. The main factor is the strike price. The closer an option’s strike price is to the actual market price of a security, the higher it’s price will be. Once it’s in-the-money, it has inherent value that makes it essentially the same price as the market security that underlies it. The expiration date of the contract is also a factor because if the expiration date is closing in, and the strike price is not quite close enough to the market price of the underlying asset, there is little chance that the option will be useful. Continue reading...
Yes, if you sell the bond before its maturity, it’s possible that you would have to sell it at a discount. If you bought a $1,000 bond with a 5% coupon, and a year later, the company issued new $1,000 bonds with a 6% coupon, you would not be able to sell your bond to someone else for $1,000 (obviously, because they would rather purchase the new bonds for $1,000 which pay more annual interest than your old one). Continue reading...
When creating an index, it must be decided what criteria will affect the value of the index, and in the case of a price-weighted index, the only consideration is the price of shares. A price-weighted index is created by adding up the individual price per share of the companies included in the index and dividing by the number of companies. Essentially what you've done is arrived at the average price per share of the companies included in the index. Continue reading...
Dividend ETFs invest primarily in preferred stock and stocks that pay regular dividends. Strategically, they tend to be either Dividend Appreciation or High Yield. Dividend ETFs are equity dividend funds that seek income from preferred stocks, common stocks. As of 2016 there are over 130 Dividend ETFs, and that’s up from about 29 in 2011 and 45 in 2012. This has become a popular strategy, obviously, and they all seek to distinguish themselves from the pack. Continue reading...
The dividend rate is basically just the value of the annual dividend of a company, stated as the monetary value. Not to be confused with the dividend yield, or the dividend growth rate, both of which are percentages. Dividend yield and dividend rate are slightly different from one another. The dividend yield is the size of a dividend in relation to the share price, and is stated as a percentage. The dividend rate is actually the amount of money paid out per share, per year, stated as a dollar amount. Continue reading...
The Price to Earnings ratio is a company’s stock price relative to its net income per share. A low P/E indicates that a stock is trading at a low premium to earnings, which may indicate that the market thinks low relative growth rates are ahead for the company. A company with a high P/E means investors are willing to pay a premium for growth, perhaps anticipating high future growth rates for the company. The P/E ratio is calculated by dividing the market value per share of a company by its earnings per share. Continue reading...
Dividends are paid at certain intervals by companies who pay them. This might be quarterly, annually, or semi-annually. The dividend rate that investors should keep up with is the annualized amount, but there is a lot to be said for quarterly or monthly payments, particularly for those actually using dividends as income, but even if you are just reinvesting. Higher dividend payment frequency means higher liquidity, more control, and probably higher returns in your portfolio. Continue reading...