Pricing Research and Execution · Hybrid Securities
Yield measures answer different questions. Current yield describes income relative to price, while yield to call assumes a particular redemption path that may never occur.
Match the measure to the question
Current yield divides an annual income amount by the purchase or market price. It ignores future price changes and redemption gains or losses. Yield to call discounts assumed payments and redemption back to the purchase price using an assumed call date. For a hybrid with discretionary distributions, those cash flows are conditional assumptions rather than assured receipts.
Use a one year example
A security costs $105, pays $6 over the year and is called at $100 at year end. Current yield is $6 divided by $105, about 5.71%. The one year total return in the stated call scenario is $1 divided by $105, about 0.95%. With one year end payment timing, that is also the scenario yield.
For several payment dates, use a dated cash flow calculation rather than dividing the total gain by the number of years. State the compounding and day count conventions when comparing published yields.
Do not misread yield to worst
A yield to worst calculation selects a lower yield among specified contractual redemption scenarios under its assumptions. It does not necessarily model default, cancelled coupons, permanent write downs or every possible extension. The phrase worst therefore does not identify the largest economic loss the investor can suffer.
Show a scenario table beside the yield
For a callable hybrid, include call, no call, payment interruption and credit stress cases. Each row should state the holding period, income received, exit or redemption value and costs. A single yield number is useful only after these assumptions are understood. Compare securities at executable prices from the same time and in the same currency before ranking them.
Try it yourself
A security costs $98, pays $5 and is redeemed at $100 after one year. What are current yield and the simple one year return?
Show the worked answer
Current yield is about 5.10%. The total gain is $7, so the one year return is about 7.14% before costs. The difference comes from the capital gain.
Further reading
Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.
