In recent years, various commentators have published criticisms of the figures produced by investment banks and analysts which promote new issues of hybrids. There is some validity to this criticism which is mostly, but not wholly, focussed on the calculation of the yields of hybrids and the use of these figures for comparison with other investments. This article discusses some of the controversial aspects of yield calculations in the hybrids market and how they came about.
What is a yield? It’s the payoff per unit, the tonnes of wheat per hectare, or the return per annum on a rental property. We look at the yield, not in isolation, but in order to measure one thing against another. If one cow produces 18 litres of milk per day then its yield is higher than another cow’s which produces 15 litres per day.
In the financial world, a yield is expressed as a percentage and mostly refers to the annual income as a proportion of the current price of an asset. In the share market, there is the dividend yield. In the property market, rental yield and in the bond market, yield to maturity.
Shares and property do not have a finite life. In theory, they go on forever. Only bonds, with the odd exception, are issued with a maturity date. This brings about the possibility of a known capital gain or loss from the time of purchase to the maturity date. In this case, a yield can also refer to the annual income plus the change in value over a year as a ratio of the purchase price.