BREAKEVEN YIELD Meaning and
Definition
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The term "breakeven yield" refers to a financial metric that determines the yield at which an investment, typically a bond, will generate a return equal to its cost or breakeven point. It is a key indicator used by investors to assess the profitability and risk associated with their bond investments.
Breakeven yield is typically calculated by comparing the current yield of a bond to its market price. It represents the yield required to recover the initial investment, including transaction costs, and break even on the investment. If the breakeven yield is higher than the current yield, it indicates that the bond is expected to generate a positive return. Conversely, if the breakeven yield is lower than the current yield, it suggests that the bond may result in a loss.
The breakeven yield is influenced by various factors including the bond's coupon rate, its maturity, market conditions, and interest rate movements. A lower coupon rate and longer maturity typically result in a higher breakeven yield, as they imply a longer period to recover the initial investment. Moreover, when interest rates rise, bond prices tend to fall, thereby increasing the breakeven yield.
By analyzing the breakeven yield, investors can evaluate the risk and profitability of their bond investments, helping them make informed decisions regarding buying, selling, or holding bonds in their portfolio. It serves as a useful tool for assessing and comparing the expected returns of different bond investments, enabling investors to optimize their portfolios and manage their risk exposure effectively.
Etymology of BREAKEVEN YIELD
The word "breakeven yield" is a finance term related to bonds and investments. The etymology of this term can be understood by breaking it down into its components:
1. Breakeven: It is derived from the verb "break even", which originated in the late 18th century in the context of business and accounting. "Break even" refers to the point at which there is no profit or loss, where total revenue equals total costs. It signifies a situation where an investment or venture neither gains nor loses money.
2. Yield: In finance, "yield" refers to the income generated by an investment, typically expressed as a percentage of the total investment. It is the return earned by the investor on an investment.
Combining these two terms, "breakeven yield" refers to the yield or return on an investment that would allow the investor to break even or reach a point of no profit or loss.
