The YIELD function in Excel is designed to calculate the yield on a security that pays interest, commonly used in the context of bonds. This function helps investors evaluate the performance of fixed-income investments by considering various parameters that influence the yield. The yield can be an essential tool for analysts, helping compare potential investments to aid in making informed decisions.
The syntax for the YIELD function is as follows:
YIELD(settlement, maturity, rate, pr, redemption, frequency, [basis])Parameters:
– settlement: Required. The security’s settlement date, which is the date after the coupon has been paid when the buyer acquires the security.
– maturity: Required. The security’s maturity date when it expires.
– rate: Required. The security’s annual coupon rate.
– pr: Required. The security’s price per $100 face value.
– redemption: Required. The security’s redemption value per $100 face value.
– frequency: Required. The number of coupon payments made per year (1 = annual, 2 = semiannual, 4 = quarterly).
– [basis]: Optional. The type of day count basis to use (0 = US (NASD) 30/360, 1 = Actual/Actual, etc.).
Examples
Example 1: Basic Yield Calculation
To find the yield of a bond purchased at a specific price with defined parameters, use:
=YIELD("2023-10-01", "2030-10-01", 0.05, 95, 100, 2)In this case, the yield is calculated using a settlement date of October 1, 2023, a maturity date of October 1, 2030, a coupon rate of 5%, a price of 95, a redemption of 100, and making semiannual payments.
Example 2: Comparing Multiple Securities
To evaluate the yields of different securities, you can set up a comparison:
=YIELD("2023-10-01", "2035-10-01", 0.04, 98, 100, 1)For a bond maturing in 2035, you’ll calculate its yield with a 4% coupon rate, priced at 98, and redeemable at 100.
Example 3: Using Different Payment Frequencies
If you want to assess a bond’s yield with quarterly payments:
=YIELD("2023-10-01", "2028-10-01", 0.06, 97, 100, 4)This calculation sets the frequency to quarterly and determines the yield based on the provided parameters.
Error Handling
When using the YIELD function, you may encounter several common errors:
– VALUE! : This error occurs if any of the arguments given are of the wrong type, e.g., a non-date settlement or maturity date.
– NUM! : Returned when a calculation cannot be performed due to invalid input values, such as negative prices.
– N/A : This can occur if the function cannot calculate the yield due to incompatible basis parameters.
Conclusion
The YIELD function in Excel serves as an essential tool for financial analysis, providing users with the means to calculate the expected return on bonds and similar securities. Mastery of this function allows investors to make informed decisions regarding fixed-income investments, aiding in portfolio management and financial planning. Familiarity with the syntax, examples, and potential errors will enable users to utilize the YIELD function effectively in various financial scenarios.