Yield represents the actual return on the investments. Different types of yield are discussed below:
Coupon Yield: The fixed interest rate on a government security or bond is called coupon yield. For example, 12.00% GOI 2008 implies that 12.00% is the coupon yield. Change in the interest rates, inflation rate or any other economic factor will not be represented by this yield.
Current Yield: Current yield is the present return available on the government security or bond based on its purchase price. It is the ratio of annual interest payment to the current market price. This can be explained with an example; ‘X' has purchased 12.00% GOI 2008 at Rs.100 and ‘Y' purchased the same instrument at Rs.110. The current yield of ‘X' = 12.00%, the current yield of ‘Y' will be 10.91%.
Yield to Maturity (YTM): Yield to maturity is the rate at which all the future cash inflows of the bond have to be discounted to equate the cost price of the bond. This can also be termed as the Internal Rate of Return (IRR) of the government security or bond.
These securities are essentially fixed income securities. They are mostly issued in the form of coupon bearing securities where the coupon may be determined by RBI or the market. At times they are also issued in the form of zero coupon securities and floating rate securities. The yield on these securities consists of coupon income and redemption yield. The coupon income is paid half-yearly in case of coupon bearing securities to the holder. The redemption yield is return on investment from discounted cash flows up to redemption. Table below shows the weighted average coupon rates on GOI securities during the period 1997-98 to 2006-07.