Yardeni Model

CFA Level II
#1

Hello,

I do not understand the fact for how we subtract off the long term earnings growth rate from the 10 year bond yield to get the earnings yield according to Yardeni model.

Could someone explain the intuition behind this?

Thanks

#2

This took me a while to understand as well.

The below examples, though structured as being about a company, are a way to conceptualize the reason why the LTGR reduces the yield (ie increases the price) of the Average A rated 10yr bond.

Three facts.

  1. Larger, financially stable companies have lower growth rates.
  2. Smaller, newer “growth” companies have a higher growth rate
  3. Lower yields = higher prices (inverse relationship for bonds)

Two scenarios

  1. An “A” rated company is budding with growth and sales have been skyrocketing but they haven’t been around a long time
  2. The company’s bond yield based on being unproven and new is high.
  3. There is a growth offset to risk (ie yield) but investors sediment about the growth matters “the Yardini weighting factor”
  4. An “A” rated company that has been long around a long time but sales have been struggling
  5. The company’s bond yield based on their current financial state is high
  6. There is a small growth offset to risk (ie yield) so the end yield will be more closely linked to the risk from the financial state of the company.

Ryan :slight_smile: