What is the definition of actual yield?

Answer 1

Actual yield is nothing but the profit we gain out of an investment or transaction after deducting the taxes and expenditures.

Let us say you buy 100 stocks of XYZ today at $25 per stock which means you have invested $2500

After 4 weeks you sell them at $35 per share which means you get $3500

You may calculate the total yield at $1000 but that is not the actual yield. Let me explain how.

while buying you would have paid brokerage to your trader and also while selling. let us say the brokerage is 0.25% of transaction amount. i.e., $6.25 while buying and $8.75 while selling.

So now the net yield is $985

Also since you sold it in one month you are bound to pay a short term gains tax to the government. Lets assume the tax is @ 10% which means you have to pay 10% of your profit which is $100

so now the yield is $885

This $885 is the actual yield whereas $1000 is the total yield.

Answer 2

When talking about bonds, they can be purchased at a premium or discount. Bonds have face values of of $1000 and are priced in percentages (for instance a bond may be quoted at 97.1 and if you were to purchase it you would pay $971.00). If you buy a bond at a discount it is like the above example you pay less that $1000 for the bond, and you buy it at a premium if you pay more than $1000. If you buy it at a discount say $950, then when it matures at its face value of $1000 you will make $50 dollars. On the flip side if you pay a premium say $1050, then when it matures at its face value of $1000 you will loose $50. Most bonds pay interest to the holder of the bond twice a year. This payment is know as the coupon. If you have a bond that pay 5% annually and you pay the face value of the bond your yield will be 5%, however if you buy the bond at a discount you will still get the 5% but will also profit when the bond matures making the effective yield higher and vice versa for a bond purchase at a premium. So the actual yield it the percent that the bond yields plus or minus the different between what you paid for the bond and its face value divided by the amount of years til maturity in relation to the purchase price.

In short actual yield takes into account the premium or discount on a bond.