Yield of securities

Profitability is one of the key concepts in investment theory. The general principle of assessing the effectiveness of any investment can be formulated as follows: "The higher the risk, the higher the yield." At the same time, the investor strives to maximize the profitability of the portfolio of securities in his possession, while minimizing the risks associated with such ownership. Accordingly, in order to be able to use this statement in practice, the investor must have effective tools for the numerical evaluation of both terms - both the risk and return on investment. And if the risk, being a qualitative category, is very difficult for formalization and quantification, the profitability, including the yield of securities of various types, can be estimated even by a person who does not have a large bag of special knowledge.

The yield of securities in its essence reflects a percentage change in the value of securities for a certain period of time. As a rule, the accounting period for determining the yield is one calendar year, even if the time remaining before the end of the paper circulation is less than a year.

The theory of investment distinguishes several types of profitability. Previously, the notion of the current profitability of securities was widely used. It is defined as the ratio of the sum of all payments received by the owner during the year due to possession of a package of securities, to the market value of the asset. Obviously, this approach could be applied only to shares for which dividends can be paid (ie, primarily, to preferred shares) and to interest bearing bonds that involve the payment of a coupon. With apparent simplicity, this approach has one significant drawback: it does not take into account the cash flow that is generated (or can be formed) by selling on the secondary market or repaying the most basic asset by the issuer. It is obvious that, as a rule, even a long-term bond's face value is much greater than the sum of all coupon payments made on it during the whole period of its circulation. In addition, this approach is not applicable to such a common financial instrument, such as discount bonds.

All these drawbacks are deprived of another indicator of profitability - yield to maturity. By the way, it is necessary to say that this indicator is fixed in IAS 39 for calculating the fair value of debt securities. Following international standards, a similar approach adopted most of the national accounting systems of developed countries.

This indicator is good in that it takes into account not only the annual income in the form of income from ownership of the asset, but also the yield of securities that the investor receives or receives less from the received discount or the premium paid when acquiring a financial asset. And, if it is a long-term investment, such a discount or premium is amortized over the entire period remaining until the security is redeemed. This approach is convenient if it is necessary to calculate, say, the yield of government bonds, which in most cases are long-term.

In calculating yield to maturity, the investor must determine for himself such an important parameter as the required rate of return. The required rate of return is the rate on the invested capital, which, from the perspective of the investor, is able to compensate him for all the risks associated with investing in such assets. Accordingly, it is this indicator that determines whether an interest-bearing bond is traded on the market at a price lower or higher than the nominal value. So, for example, if the required rate of return is higher than the annual coupon rate, then the investor will seek to compensate for this difference by discounting the face value of the bond. Conversely, if the required rate of return is lower than the annual coupon rate, the investor will be ready to pay the seller or issuer of the bonds an amount exceeding the nominal value of the security.