Section 13.1: Yields and Returns

  • 1️⃣ What Is Yield?

  • 2️⃣ Current Yield (CY))

  • 3️⃣ Capital Gains and Losses

  • 4️⃣ Realized vs. Unrealized Gains/Losses

What Is Yield?

  • Yield measures how much income an investor earns as a percentage of the cost (or market value) of an investment.

  • It shows how efficiently the investment produces income.

Current Yield (CY)

  • Applies to both stocks and bonds.

  • For stocks, income comes from dividends — this is called dividend yield.

  • For bonds, income comes from interest payments (coupon payments).

Formula:

Current Yield (CY) = Annual Income / Current Market Value

Example:

  • ABC Corp pays a $0.25 quarterly dividend and trades at $20/share.

0.25 × 4 = 1.00 (annual income)

1.00 / 20 = 0.05 = 5%

✅ CY = 5%

Note: CY is always expressed as an annual percentage.

Capital Gains and Losses

  • Capital gain: When you sell an investment for more than you paid.

  • Capital loss: When you sell for less than you paid.

  1. Formula:

    Sales Proceeds − Adjusted Cost Basis = Capital Gain or Loss

    Example:

    • Buy 100 shares of ABC at $22 → cost = $2,200

    • Sell 100 shares at $25 → proceeds = $2,500

  2. 2,500 − 2,200 = 300 gain

    ✅ Capital Gain = $300

Yields & Returns

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Yields & Returns 〰️

Realized vs. Unrealized Gains/Losses

Term / Meaning / Example

  • Realized Gain or Loss / You have closed the position (sold the investment). The gain/loss is final and taxable / Selling ABC at a profit or loss.

  • Unrealized Gain or Loss / You still hold the investment — it’s only a paper gain or loss / ABC’s price rises while you still own it.

Total Return:

  • Total Return measures everything you earned (or lost) on an investment, including:

    • Income (dividends or interest)

    • Capital gains/losses

  1. Formula:

    Total Return = (Income + (Gain or - Loss)) / Cost Basis

    Example:

    • Buy 100 shares of Glengarry Real Estate at $20.

    • Sell after 1 year for $21 (gain = $1).

    • Company paid $0.25 quarterly dividend = $1 total income.

  2. (1 income+1 gain) / 20= 2 / 20 = 0.10 = 10%

    ✅ Total Return = 10%

✺ Review questions ✺

  • CY = Annual Income ÷ Current Market Value

  • $0.50 × 4 = $2 ÷ $40 = 5% CY

    • Realized gain/loss: occurs when position is closed (sold).

    • Unrealized gain/loss: occurs on open positions (not yet sold).

  • $35 – $30 = $5 gain/share × 100 = $500 total gain

  • (Income + Gain) ÷ Cost Basis = ($2 + $5) ÷ $30 = 7 ÷ 30 = 23.3% total return

  • “Flat” means the investor no longer holds the position — it’s been closed.