SIE Ready⚡ Trading & Settlement · Lesson 4 of 6 · 6 min
Measuring the Payoff: Yields and Returns
📊 A stock 'yields 4%' and 'returned 12%'. Both can be true at once, because they measure different things.
💡 Key idea
Current yield looks only at income; total return adds price change. Real return subtracts inflation; after-tax return subtracts taxes.
🧠 Why it matters
CURRENT YIELD = annual income ÷ current market price. A $1,000 bond paying $50 a year that trades at $800 has a current yield of 6.25%. TOTAL RETURN = (income + change in price) ÷ starting price. Buy at $40, collect $2 in dividends, sell at $44: ($2 + $4) ÷ $40 = 15%. YIELD TO MATURITY adds the gain or loss to par: a discount bond's YTM is above its current yield. REAL RETURN = nominal return − inflation: 7% with 3% inflation is about 4% real. AFTER-TAX RETURN = return × (1 − tax rate). COST BASIS is what you paid, including commissions; gain or loss is sale proceeds minus basis.
📈 In the real world
🧮 Omar, a fictional investor, bought a fund at $25 and sold at $24 after collecting $2 in distributions. He thinks he lost money. His rep shows total return: ($2 − $1) ÷ $25 = 4%, positive despite the lower price.
📌 Takeaways
- Current yield = annual income ÷ current price
- Total return = (income + price change) ÷ starting price
- Real = nominal − inflation; after-tax = return × (1 − tax rate)
✅ Test yourself
A stock pays $1.20 a year in dividends and trades at $30. What is its current yield?
- 4.0%
- 1.2%
- 2.5%
- 3.6%
Answer: A · 4.0%
Current yield = $1.20 ÷ $30 = 4%. The other figures come from dividing by the wrong price or confusing the dollar dividend with a percentage.
A portfolio earned 6% nominally while inflation was 4%. What is the approximate real return?
- 10%
- 4%
- 2%
- 6%
Answer: C · 2%
Real return ≈ nominal minus inflation: 6% − 4% = 2%. 10% adds the two, and 6% ignores inflation entirely.
Which measure includes both income and the change in price?
- Dividend rate
- Current yield
- Nominal yield
- Total return
Answer: D · Total return
Total return combines income and price change over the starting value. Current yield, nominal (coupon) yield and dividend rate look at income only.
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