In finance, the terms yield and interest rate seems similar and interchangeable though there are many differences between the two terms. The concepts of the two terms are similar and co-related, and very important for investors to know.
Though the two terms are used very widely and differently in business, the two terms are used in totally different situations.
Yield vs Interest Rate
The difference between Yield and Interest rate is that yield represents the money lent, while interest rate represents the borrowed money. Yield is the percentage of earnings a person gets back from an investment over a specific period. An interest rate is the percentage rate that is charged when a person wants a loan.
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Yield is the amount of money returned to the investor after using it for a temporary condition. Yield is the profit that is made on an investment, a collective profit earned by investing in financial commodities. It is higher than interest.
Interest is the percentage of fees charged by the lender to the loaner for the amount of money the loaner has borrowed. The interest rate differs according to the money, and it is always decided in percentage.
It can be 2%, 5%, 10%, or any percentage and have to be turned in to the lender above the money he has loaned.
|Parameters of Comparison||Yield||Interest Rate|
|Definition||Yield is the total earning which is made from the investment.||The interest rate is the fixed percentage amount that the loaner has to pay the lender over the principal amount.|
|Time Period||A yield is calculated annually.||It can be weekly, monthly, quarterly, or annually.|
|Dependence||Yield includes the interest rate.||The interest rate is calculated independently of yield.|
|Formula||Yield = Net Realized Return / Principal Amount||Interest Rate = (Simple Interest × 100)/(Principal × Time)|
|Presented as||Mostly as presented but sometimes in the currency as well.||Always in percentage.|
What is Yield?
A yield is a measure that is a profit on an investment returned to the holder of the security, such as a stock or bond. It is profit which is gained, or cash flow returned to the investor, over a specific time.
Mostly, a yield is calculated annually, though sometimes it is also calculated quarterly and half-yearly.
Yield is a term used in stocks, bonds, annuities, fixed-income instruments, etc. Yield is the total earning or profit of the investor, which includes interest as well. It also includes dividends that are received by holding particular investments.
For putting money in an investment, the investor earns interest and dividends, the money that the investor gain as a total is called the yield.
Yield is more accurate and gives a precise understanding of the total earning made from an investment as it considers factors such as tax benefits.
There are different types of yield with different methods of calculation according to the type of security. They are: Yield On Stocks, Yield on Bonds, Yield to Maturity, Yield to worst, and yield to call.
The common formula for calculating the yield is Yield = Net Realized Return / Principal Amount.
What is the Interest Rate?
Interest rate is the fixed percentage that the loaner has to turn in to the lender as interest on the borrowed money. The interest rate depends on the amount of money that is borrowed and the time period.
The time can be weekly, monthly, quarterly, annually, etc. An interest rate is always applied on loan. The loan can be given by any bank or money lender.
For example, if you borrow 10,000 $ for a year and there is an interest rate of 10% a year, then the borrower has to give the 10% of 10000$ as interest. That is, he has to give 1000$ as interest. The total being 11000$.
There are many different types of interest: Fixed interest, variable interest, simple interest, discount rate, prime rate, compound interest, etc. Mostly, simple interest and compound interest are used.
The interest rate formula helps calculate the amount of money that has to be repaid towards a loan taken and the interest on it. And interest rate is always calculated and presented in percentage terms.
The formula of simple interest rate: Interest Rate = (Simple Interest × 100)/(Principal × Time)
The formula of compound interest: Compound interest rate = Principal amount (1+ rate of interest) time period – Principal amount
Main Differences Between Yield And Interest Rate
- Yield is the total earning which is profited from the investment, which also includes the interest rate. However, the interest rate is the fixed percentage amount the loaner must pay to the lender.
- Yield is always higher than the interest rate.
- Yield includes the interest rate, while on the other hand, the Interest rate is independent of the yield.
- Yield is calculated annually however, the interest rate can be calculated weekly, monthly, annually, quarterly, etc.
- The yield represents the lent money, while the interest rate represents the borrowed money.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.