Glossary

Yankee bonds are bonds issued in dollars in the United States by overseas companies and governments.

The purpose is to raise more money than the issuers may be able to borrow in their home markets, either because there is more money available for investment in the United States, or because the interest rate the issuers must pay to attract investors is lower.

US investors buy these bonds as a way to diversify into overseas markets without the potential drawbacks of currency fluctuation, foreign tax, or different standards of disclosure that may be characteristic of other markets.

Yield is the rate of return on an investment expressed as a percent.

Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment.

In the case of stocks, yield is the dividend you receive per share divided by the stock's price per share. With bonds, it is the interest divided by the price you paid. Current yield, in contrast, is the interest or dividends divided by the current market price.

In the case of bonds, the yield on your investment and the interest rate your investment pays are sometimes, but by no means always, the same. If the price you pay for a bond is higher or lower than par, the yield will be different from the interest rate.

For example, if you pay $950 for a bond with a par value of $1,000 that pays 6% interest, or $60 a year, your yield is 6.3% ($60 ÷ $950 = 0.0631). But if you paid $1,100 for the same bond, your yield would be only 5.5% ($60 ÷ $1,100 = 0.0545).

A yield curve shows the relationship between the yields on short-term and long-term bonds of the same investment quality.

Since long-term rates are characteristically higher than short-term rates, a yield curve that confirms that expectation is described as positive. In contrast, a negative yield curve occurs when short-term rates are higher.

A flat or level yield curve occurs when the rates are substantially the same.

Yield to maturity is the most precise measure of a bond's anticipated return and determines its current market price.

YTM takes into account the coupon rate and the current interest rate in relation to the price, the purchase or discount price in relation to the par value, and the years remaining until the bond matures.

Although YTM figures are complex to calculate, brokers will supply this information if you ask, or you can use a calculator programmed to provide YTM figures.