Yield gap explained

The yield gap or yield ratio is the ratio of the dividend yield of an equity and the yield of a long-term government bond. Typically equities have a higher yield (as a percentage of the market price of the equity) thus reflecting the higher risk of holding an equity.^{[1] [2]}

YieldGap = (YieldRatioofEquity)/(YieldRatioofBond)

The purpose of calculating the yield gap is to assess whether the equity is over or under priced as compared to bonds. For a given equity, the following cases may be considered:

• If the yield gap is numerically small, then equity yield is lower than bond yield implying that the equity is overpriced.
• If the yield gap is numerically large, then equity yield is higher than bond yield implying that the equity is cheap.

See also

Yield (finance)

Notes and References

1. https://web.archive.org/web/20060507163743/http://glossary.reuters.com/index.php/Yield_Gap Yield Gap
2. http://moneyterms.co.uk/yield-gap/ Yield Gap