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Chapter 3

Calculating yields on financial products

4.1 Equity

 The total return to shareholders = dividends + growth in the share price

 Dividend yield = [dividend/share price] × 100%

– Only looks at current/most recent dividend so does not incorporate future
growth expectations.

4.2 Bonds

 The total return to bondholders = interest + gain on redemption

 Bill rate = coupon rate

 Running yield = [interest/bond price] × 100%

– Only looks at current/most recent interest so does not incorporate future
gain on redemption

 Gross redemption yield incorporates gain on redemption (calculation off
syllabus)

4.3 Risk

 Required return = risk-free return + risk premium

 An increase in risk  required return increases  fall in share (bond) price

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