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What is the ‘Risk-Free Rate of Return’?

The risk-free rate of return is the rate an investor can get on a risk-free asset at a given time. It is usually the current yield on a 10-year treasury, which is backed by the full faith and credit of the US Government and is considered risk-free. The risk-free rate is used in several calculations and considerations in finance, to show what return can be earned in the current market environment without being exposed to any risk. Continue reading...

What is a Treasury Note?

Treasury notes are government-issued coupon bonds with maturities between 1 and 10 years. A large secondary market exists for Treasury Notes, and they can be acquired at issue in a competitive bid or a noncompetitive bid auction. They are extremely popular for their marketability and six-month interest payment schedule. They do have interest rate risk, since treasuries issued with higher interest rates will make the ones already issued with lower rates less valuable. Continue reading...

What Is the Treasury Yield?

The Treasury yield is the interest rate that the U.S. government pays to borrow money for different lengths of time. Treasury Yield: What It Is and Factors That Affect It. When it comes to financial markets, the term "Treasury yield" is frequently bandied about, often with significant implications for investors, borrowers, and the broader economy. In this article, we'll delve into what the Treasury yield is, how it works, and the factors that influence it. Continue reading...

What is Yield?

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...

What is the “Riskless” (or Risk-Free) Rate of Return?

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...

What are Current Yields?

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...

What are TIPS?

Treasury Inflation Protected Securities (TIPS) are coupon-paying treasuries issued by the US Government whose principal amount adjusts with inflation. When a consumer buys Treasury Inflation Protected Securities (TIPS), they experience a few benefits when compared to other investment options. One benefit is that the security is backed by the full faith and credit of the US Government. Another benefit is that the principal amount adjusts automatically for inflation with the Consumer Price Index. Continue reading...

What is the currency carry trade?

Assets that are held are sometimes analyzed in terms of the cost of carrying them, called the cost of carry. In certain situations, there may be a potential for profit if an asset that might otherwise have a cost of carry could be traded for an asset that actually generates profit. The arbitrage opportunity that exists in that space, and the market formed by it, is sometimes called the carry trade, or the currency carry trade where it applies to currency. Continue reading...

What is Annual Percentage Yield (APY)?

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...

What is an Inverted Yield Curve?

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...

What Does Market Risk Premium mean?

Market Risk Premium refers to the expected return on a risk asset, minus the risk-free rate. A good barometer for the risk-free rate is using a U.S. Treasury bond, which is largely considered a risk-less asset if held to maturity. To give an example, let’s say the annual expected return on Stock ABC is 11%, and a 1-year U.S. Treasury pays 2%. In this case, the market risk premium is the difference between the two, or 9%. Continue reading...

What is a Yield Curve?

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...

What is Yield to Maturity?

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...

What is Dividend Yield?

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...

What is Bond Yield?

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...

B-/B3 — credit rating

B- — S&P / Fitch B3 — Moody’s In the world of junk bonds, a B3/B- rating is about as low of a rating as most investors will venture to explore. Bonds are rated by independent ratings institutions known as the Big Three: Moody’s, Fitch, and S&P. Two companies, S&P and Fitch, use the same symbols, and the B- in this example belongs to them. Moody’s has its own system, and the B3 in this example is theirs. Continue reading...

What Types of Bonds Are There?

Bonds are divided into a several categories, and it is possible to get substantial diversification within a bond portfolio alone. Bonds may be categorized into several types. There are investment grade bonds which are conservative and safe, high-yield bonds which are relatively risky and profitable, floating rate bonds whose coupon rate is not fixed, zero coupon bonds which only pay at maturity, and foreign bonds, and so on. Continue reading...

What Percentage and What Kind of Bonds Should I Have in My Portfolio?

Bonds can provide consistency and balance to a portfolio otherwise comprised of stocks. In the long run, stocks are generally associated with a higher yield, but as we know, higher returns mean higher risks. Bonds are seen as a safer, yet lower-yielding investment. Bonds offer a spectrum of risk and return potential, however, and various kinds of bonds and bond funds can be used in various market climates and portfolios. Continue reading...

What is a Money Market?

Money markets are very short duration debt securities, essentially the equivalent of cash traded between banks and offered to investors at a very nominal interest rate. Money market securities are essentially IOUs issued by governments, financial institutions and large corporations, and they’re traded between each other in very high denominations. Retail investors can gain access to money markets via money market funds, which generally pay very low interest rates. Continue reading...

What are Mortgage-Backed Securities?

Mortgage-backed securities (MBS) are products that bundle mortgages together and are traded like securities for sale on the markets. Typically investment banks build these products by bundling mortgages with different interest rates and risk premiums, with the hope of the investor gaining a higher yield than can be found from traditional risk-free products, like U.S. Treasuries. Mortgage-backed securities got an infamous name during the 2008 financial crisis, as many of the packaged loans were subprime in nature. Many MBS products lost incredible value during the crisis, particularly following ruling FAS 157, which required banks to mark their value to market. Continue reading...