Difference Between Yield and Interest Rate

In the world of finance, understanding the difference between yield and interest rate is essential for making informed investment and savings decisions. Both terms are often used interchangeably, but have distinct meanings and implications for financial planning. 

Yield refers to the income generated from an investment over a specific period, expressed as a percentage of the investment’s current market value. It is a critical metric for evaluating the performance of financial instruments such as bonds, stocks, and fixed deposits. Yield encompasses interest payments, dividends, and other earnings, making it an essential factor for investors seeking to maximise returns.

Types of Yield

1. Current Yield: The annual income (interest or dividends) divided by the current market price of the investment. For example, if a bond pays Rs. 1,000 annually and is currently priced at Rs. 10,000, the current yield is 10%.
2. Yield to Maturity (YTM): The total return expected if a bond is held until maturity, including interest and capital gains.
3. Dividend Yield: The annual dividend per share divided by the current market price of the stock. For example, if a stock priced at Rs. 50 pays Rs. 2 annually in dividends, the yield is 4%.
4. Effective Yield: Considers the compounding effect on returns, providing a more accurate representation of the total earnings.

Yield Formula Examples

The formula for calculating yield is:
 

Yield = (Income from investment / Current market value) × 100

Example:
If a bond pays Rs. 500 annually and is priced at Rs. 5,000, the yield is:
Yield = (500 / 5000) × 100 = 10%

Bajaj Finance Fixed Deposit is an excellent option for allocating savings or building an emergency fund. With flexible tenures ranging from 12 to 60 months, you can invest as low as Rs. 15,000 and enjoy assured returns. Book FD. 

The interest rate is the percentage charged by a lender for borrowing money or paid by an issuer to a depositor or bondholder. It is calculated based on the principal amount and is typically fixed for the tenure of the loan or deposit. For instance, with Bajaj Finance Fixed Deposits, you can earn competitive interest rates of up to 7.30% p.a., ensuring steady and predictable returns. Book FD.

Types of Interest Rates

1. Fixed Interest Rate: Remains constant throughout the tenure of the loan or deposit, providing stability and predictability in returns. For example, Bajaj Finance Fixed Deposits offer fixed interest rates, ensuring guaranteed returns.
2. Floating Interest Rate: Varies based on market conditions or benchmark rates, which can lead to fluctuations in returns.

Interest Rate Formula

The formula for calculating simple interest is:
Interest = (Principal × Rate × Time) / 100

Example:
If Rs. 20,000 is invested at an interest rate of 8% per annum for 2 years, the interest earned is:
Interest = (20,000 × 8 × 2) / 100 = Rs. 3,200

While yield and interest rate are closely related, they differ in their calculation, application, and significance. Below is a comparison table that highlights the key differences:

Understanding these differences is crucial when evaluating financial instruments like Bajaj Finance Fixed Deposits, which offer guaranteed interest rates for stable returns. Check rates. 

Both yield and interest rate are essential concepts in financial planning. While the interest rate represents the fixed return or borrowing cost, the yield provides a more comprehensive view of actual earnings, factoring in market conditions and reinvestments. 

For investors seeking secure and predictable returns, Bajaj Finance Fixed Deposits offer a reliable option with competitive interest rates of up to 7.30% p.a., flexible tenures ranging from 12 to 60 months, and the assurance of a CRISIL AAA/STABLE rating. Start your investment journey today with a minimum deposit of Rs. 15,000 and achieve your financial goals with confidence.