atans1

DBS Pref Share: Yield? Waz that?

In Uncategorized on 22/11/2010 at 3:02 pm

What is the yield on a preference share?

The yield is the return received by an investor who buys the pref share at today’s market price.

Example: Say you applied for and got allocated S$100 of DBS’s latest pref share issue. As this pays an annual interest rate of 4.7%, or S$4.7 a year, the yield is 4.7%. But supposing the market price of the bond falls to S$50. The interest payment (the coupon) is still S$4.7 per year. So for the S$50 investment the investor can get a S$4.7 annual payment, which is a return or “yield” of 9.4%.

Remember that rising (or fears of) interest rates and inflation drives down pref shares prices, which pushes up their yields. So do concerns about the creditworthiness of the issuer.

The above analysis also applies to bonds and Reits.

Update on 24 November. At time of writing, it is tradingĀ at $102.52. The yield is 4.58% for the buyer in the market, not the 4.7% that an investor who got an IPO allocation.

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