Yield Ratio

What is a Yield Ratio?

The yield ratio helps compare returns across investments like stocks and bonds to determine which offers better value. It is particularly useful in the bond market, where investors assess differences in interest rates, risk, and issuers. It guides decisions on which investment is more profitable or safer.

Common Types of Yield Ratios

1. Bond Yield Ratios:

Yield to Maturity (YTM) Ratio: Compares bond returns until maturity.

Credit Spread Ratio: Compares corporate vs. government bond yields to assess credit risk.

Yield Curve Ratios: Compares short vs long term bond yields to analyze interest rate trends.

2. Stock Yield Ratios:

Dividend Yield Ratio: Compares stock dividend returns.

Earnings Yield Ratio: Compares stock earnings to price.

Importance of Yield Ratios

Understanding Risk: Helps investors weigh the potential return against the risk of different investments.

Finding Good Deals: Compares yields to spot undervalued or overvalued assets.

Reading Market Mood: Certain yield ratios (like the equity risk premium) show whether investors are feeling confident or cautious.

Smart Investing Decisions: Helps balance a portfolio by comparing yields across different asset classes.