What Is Breakeven Yield?

The breakeven yield is the yield required to cover the cost of marketing a banking product or service. Breakeven yield is the point at which ✅the money, which the sale of a p♛roduct or service brings in, is equal to the cost of marketing the product or service.

A finan🐓cial institution re🧸alizes no profit or loss at the breakeven point.

Understanding Breakeven Yield

💟The breakeven yield allows a decision-maker to have knowledge about the minimum volume required to earn a ༺specific rate of return on a product or service.

Examples of products and services for individuals and small businesses in commercial banking include deposits, checking accounts, loans for business, personal and mortgage uses, and 澳洲幸运5开奖号码历史查询:certificates of deposit (CDs) and savings accounts.

Commercial banks generate money by realizing a spread between the interest they pay on deposits and the interest they earn on loans. This is known as 澳洲幸运5开奖号码历史查询:net interest income. To be more specific: customer deposits into checking, savings, and money market accounts and CDs provide 𝔉banks with the capital to make loans.

Providing loans allows institutions to earn interest income from those loans. Types of loans can include mortgages, auto loans, business loans, and personal loans. The 澳洲幸运5开奖号码历史查询:interest rate paid by the bank on the money theyไ borrow is less than the rate charged on the money they lend, which yields a profit.

Typically, breakeven 💧yields for loan products involve a series of simple calculations. Interest expense is added to noninterest expense and then subtracted from noninterest income and divided by earnings assets.

Breakeve𒁃n Yie🐟ld and Additional Common Yield Calculations

Outside of bank profitability, specific yield calculations are common when determining 澳洲幸运5开奖号码历史查询:bond values. Investors will🌳 often use different versions of yield in the contexts of:

Nominal Yield

澳洲幸运5开奖号码历史查询:Nominal yield is a bond's couღpon rate and the interest rate (to par value) that the issuer of the bond promises to pay bond purchasers. The nominal yield is fixed and applies for the entire life of the bond. The nominal yield can also be referred to as nominal rate, coupon yield, or coupon rate.

Current Yield

Slightly more complex, the current yield is the annual income of an investment (in the form of interest or dividends) divided by the security's 澳洲幸运5开奖号码历史查询:current price. It can be represented as follows:

 $\text{Current Yield}=\frac{\text{Annual Cash Inflows}}{\text{Market Price}}$Current Yield=Market PriceAnnual Cash Inflows​

Current yield is not the 澳洲幸运5开奖号码历史查询:actual return an investor receives if he holds𒉰 a bond until maturity. Instead, it represents the return an investor would expect if the owner purchased the bond and held it for a year.

Yield to Maturity

澳洲幸运5开奖号码历史查询:Yield to Maturity (or YTM) is a total return calculation (a long term bond yield), expressed as an annual rate. It is the total return anticipated on a bond if the bond were held until it matures. In other words, it is the 澳洲幸运5开奖号码历史查询:internal rate of return (IRR) of a bond if the investor holds the bꦜond until mat♍urity, with all payments made as scheduled and reinvested at the same rate.

 The formula to calculate 𓆏YTM of a discount bond thus appears similar to IRR:

 $\begin{aligned} &YTM=\sqrt[n]{\frac{\textit{Face Value}}{\textit{Current Price}}}-1\\ &\textbf{where:}\\ &n=\text{number of years to maturity}\\ &\text{Face value}=\text{bond's maturity value or par value}\\ &\text{Current price}=\text{the bond's price today} \end{aligned}$​YTM=nCurrent PriceFace Value​​−1where:n=number of years to maturityFace value=bond’s maturity value&🐭nbsp;or par valueCurrent price=the bond’s price today​