What it means
When you buy a bond or other income-producing asset, the seller quotes a yield. That number assumes you hold the asset until maturity, that every payment arrives on time and that you can reinvest at the same rate.
Real life often disagrees, because you may sell early, the issuer may default, or interest rates may move. Realised yield looks backwards at what happened.
It combines the income you received, such as coupons or dividends, with the difference between the sale price and the price you paid. It then converts the total result into an annual rate so you can compare investments held for different lengths of time.
This makes it a useful reporting measure for funds and treasury teams reviewing their decisions. If a bond was bought at a yield of 6% but sold early after interest rates rose, the realised yield could be much lower.
Looking at the gap helps managers see whether their forecasts were reasonable. The annualising step is where people go wrong.
Because returns compound, the correct method takes the total growth factor and raises it to the power of one divided by the number of years. Simply dividing the total return by the number of years gives a slightly different answer, which is acceptable for rough work but not for formal reporting.
A fully accurate realised yield also reflects reinvestment, taxes and fees. In practice, analysts often compute a pre-tax version and mention what has been left out.
Always check which version a report uses before comparing two figures. The measure is also useful when assessing a fund manager's decisions.
If the quoted yield on the bonds bought was 6% but the realised yield was 3%, the manager needs to explain whether the gap came from selling early, credit losses or poor timing. Over several years, a pattern of shortfalls points to a problem in the process.
In practice
Real-world examples.
Example
A company treasurer buys a corporate bond with a quoted yield of 5%, but sells it after one year when it has risen in price. She received $500 in interest and a $400 price gain on a $10,000 holding, so the realised yield is 9%. She notes that the result was driven by the price gain, not the income.
Example
A pension fund sells a government bond early to meet payouts, just as market interest rates have risen. The bond has fallen in price, so the realised yield comes out at 2.1% against 4% at purchase. The trustees record the difference as the cost of selling early.
Example
A property investor buys a rental flat for $200,000, collects $12,000 net rent each year for three years and sells for $212,000. She received $36,000 of rent plus a $12,000 gain, so the total is $248,000. The growth factor is 1.24 and the annualised realised yield is about 7.4%.
Formula
Calculation
Realised yield (annualised) = [(Sale proceeds + Income received) / Purchase price] ^ (1 / Years held) - 1
Suppose an investor buys a bond for $10,000 and holds it for 2 years. The bond pays coupons of $600 each year, totalling $1,200, and the investor sells it for $10,900. Total value received is 10,900 + 1,200 = $12,100, so the growth factor is 12,100 / 10,000 = 1.21. The annualised realised yield is 1.21 ^ (1/2) - 1 = 1.10 - 1 = 0.10, or 10%. This ignores reinvestment of the coupons and any fees.Case study
Seen in the real world.
Fernhill Capital is an illustrative, fictional investment club that bought a $50,000 bond fund promising a yield of 5.5%. Two years later, a member needed cash, and the club sold at a price $1,500 below the purchase price after receiving $2,700 of income each year.
The total received was 48,500 plus 5,400, or $53,900, so the growth factor was 1.078 and the annualised realised yield was about 3.8%. That was well below the quoted 5.5%, mainly because interest rates had risen in the meantime.
The club's treasurer wrote a short note for members explaining the gap. In this illustrative case, the lesson was that a quoted yield is only a promise, and selling early can turn a good-looking yield into a modest one. Had the club held to maturity, it would have kept receiving the full coupon and been repaid in full, so the early sale was the real cause of the shortfall.
Watch out
Common mistakes.
- Quoting the yield at purchase as if it were what the investor eventually earned.
- Dividing total return by years instead of annualising with the compounding formula.
- Ignoring fees and tax, which can reduce the realised yield noticeably.
Questions
People also ask.
How is realised yield different from yield to maturity?
Yield to maturity is a forecast that assumes the bond is held to the end, while realised yield measures what was actually earned over the holding period.
Can realised yield be negative?
Yes, if a price loss on sale is bigger than the income received, the annual result is below zero.
Does realised yield include reinvested income?
A basic calculation does not, but a more careful version adds the return earned on reinvested payments. Always check which method a report uses before comparing it with another.
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