- Comparing hybrid yields is not straightforward
- There are a number of different ways to measure yield
Recent issues of new hybrid securities have placed a spotlight on the most common reference point for investors – ‘What is the yield?’ Unfortunately, many market commentators use the term casually without regard to what exactly they are referring to. This is then used to compare the investment against other investments. One of the reasons commentators do this is that the answer to the question is not straightforward and perhaps even misunderstood. And with more hybrid issues likely in the next 12 months investors should pay closer attention to the sales pitches.
What is a yield?
In the financial world, yield often refers to the percentage return from the sum invested:
Nominal yield – is the annual return on the face value of the security and is often referred to as the “coupon rate”. If a security with a face value of $100 pays an annual distribution of $4.25 the nominal yield is $4.25/$100 or 4.25%.
Running yield– is the annual return divided by the current price. If a security is purchased for $95 and it pays an annual distribution of $4.25 the running yield is $4.25/$95 or 4.47%.
Trading margin– is the current coupon annualised plus any capital gain/loss on a per annum basis, all divided by the current “clean” price, less some benchmark rate (BBSW or swap rate).
Yield to maturity– is annual return of buying a security and holding it until maturity. The yield to maturity includes all distributions and any capital gain (or loss) on the face value. So if a $100 face value security is bought for $95 and is held until maturity before being redeemed by the issuer at $100, the return to the investor is the distribution of $4.25 per annum plus the $5 of capital expressed as a yield per annum. On a 1 year security the return would be $4.25 of distributions plus $5 of capital gain on a purchase price of $95 – a yield to maturity of 9.74%.