Glossary

Current return, also called current yield, is the amount of interest you earn on a bond in any given year, expressed as a percent of the current market price.

The current return will, in most cases, not be the same as the coupon rate, or the interest rate the bond pays calculated as a percentage of its par value.

For example, if the par, or face value, of a bond is $1,000 and the coupon rate is 5%, then the interest payments, or annual income, from the bond is $50 per year. If, however, the bond is trading at $900, then that $50 annual income is actually a current return of 5.6%.

The current return does not take capital gains or losses into account, so it is not a reflection of the total return on your bond investment.

Inflation-adjusted return is what you earn on an investment after accounting for the impact of inflation.

For example, if you earn 7% on a bond during a period when the inflation rate averages 3%, your inflation-adjusted return is 4%.

Inflation-adjusted return is also known as real return.

Since inflation diminishes the buying power of your money, it's important that the rate of return on your overall investment portfolio be greater than the rate of inflation. That way, your money grows rather than shrinks in value over time.

Rate of return is income you collect on an investment expressed as a percentage of the investment's purchase price. With a common stock, the rate of return is dividend yield, or your annual dividend divided by the price you paid for the stock.

However, the term is also used to mean percentage return, which is a stock's total return -- dividend plus change in value -- divided by the investment amount.

With a bond, rate of return is the current yield, or your annual interest income divided by the price you paid for the bond. For example, if you paid $900 for a bond with a par value of $1,000 that pays 6% interest, your rate of return is $60 divided by $900, or 6.67%.

You find the real rate of return on an investment by subtracting the rate of inflation from the nominal, or named, rate of return.

For example, if you have a return of 6% on a bond in a period when inflation is averaging 2%, your real rate of return is 4%. But if inflation were 4%, your real rate of return would be only 2%.

Finding real rate of return is generally a calculation you have to do on your own. It isn't provided in annual reports, prospectuses, or other publications that report investment performance.

Your return is the profit or loss you have on your investments, including income and change in value.

Return can be expressed as a percentage and is calculated by adding the income and the change in value and then dividing by the initial principal or investment amount. You can find the annualized return by dividing the percentage return by the number of years you have held the investment.

For example, if you bought a stock that paid no dividends at $25 a share and sold it for $30 a share, your return would be $5. If you bought on January 3, and sold it the following January 4, that would be a 20% annual percentage return, or the $5 return divided by your $25 investment.

But if you held the stock for five years before selling for $30 a share, your annualized return would be 4%, because the 20% gain is divided by five years rather than one year.

Percentage return and annual percentage return allow you to compare the return provided by different investments or investments you have held for different periods of time.

Return on equity (ROE) measures how much a company earns within a specific period in relation to the amount that's invested in its common stock.

It is calculated by dividing the company's net income before common stock dividends are paid by the company's net worth, which is the stockholders' equity.

If the ROE is higher than the company's return on assets, it may be a sign that management is using leverage to increase profits and profit margins.

In general, it's considered a sign of good management when a company's performance over time is at least as good as the average return on equity for other companies in the same industry.

Your return on investment (ROI) is the profit you make on the sale of a security or other asset divided by the amount of your investment, expressed as an annual percentage rate.

For example, if you invested $5,000 and the investment was worth $7,500 after two years, your annual return on investment would be 25%. To get that result, you divide the $2,500 gain by your $5,000 investment, and then divide the 50% gain by 2.

Return on investment includes all the income you earn on the investment as well as any profit that results from selling the investment. It can be negative as well as positive if the sale price plus any income is lower than the purchase price.

When you buy a US Treasury bill that matures in 13 weeks, you're making a risk-free investment in the sense that there's virtually no chance of losing your principal (since the bill is backed by the US government) and no threat from inflation (since the term is so short).

Your yield, or the amount you earn on that investment, is described as risk-free return. By subtracting the risk-free return from the return on an investment that has the potential to lose value, you can figure out the risk premium, which is one measure of the risk of choosing an investment other than the 13-week bill.

Total return is your annual gain or loss on an equity or debt investment.

It includes dividends or interest, plus any change in the market value of the investment. When total return is expressed as a percentage, it's figured by dividing the increase or decrease in value, plus dividends or interest, by the original purchase price.

On bonds you hold to maturity, however, your total return is the same as your yield to maturity (YTM).

Calculating total return is more complex if your earnings have been reinvested, as they often are in a mutual fund, to buy more shares. But fund companies do that calculation on a regular basis.

A total return index is an equity market index that's calculated using the assumption that all the dividends that the stocks in the index pay are reinvested in the index as a whole.

Since an index is not an investment, but a statistical computation, the re-investment occurs only on paper, or, more precisely, in a software program.