Private Debt

CHAPTER 4Current Yield or Yield to Maturity?

Yield is one of the most basic of financial measures and one that strongly influences investor behavior. This is especially true for fixed income where return is mostly driven almost entirely by coupon income. Direct corporate loans also fall into this description. Other asset classes that distribute most or all their earnings, from whatever source, also rely on yield to inform investors about investment attractiveness. These include real estate investment trusts (REITs) and master limited partnerships (MLPs). While yield at first seems the most intuitive of concepts, investors find that it can take on unexpected complexity when applied in practice. Since direct lending returns depend almost entirely on their yield, understanding how yields are calculated is especially important.

There are two basic yield calculation methods, current yield and yield‐to‐maturity.

CURRENT YIELD

In earlier chapters references to direct lending yield used the current yield method. Current yield is calculated as the most recent quarter's interest income divided by average assets over the quarter. Assets are defined by their fair value in the current yield calculation, not their cost or principal value. For example, Cliffwater Direct Lending Index (CDLI) interest income during the 2017 fourth quarter totaled $2.3 billion on a fair value of assets that averaged $90.4 billion. Dividing income by assets gives a quarterly yield equal to 2.52%. We multiply ...