When you are conducting financial analysis on potential investments, current yield is just one of the indicators that you have to consider. It is important to remember that current yield does not take into account the capital gains or losses that you may realize when you sell the asset. For example, if you purchase a bond for $950 and hold it until it matures, you will receive $1,000 back (the par value). This means that your capital gain would be $50 ($1,000 – $950).
In addition to capital gains, other factors that you need to consider when conducting financial analysis include:
– Risk – What is the risk associated with the investment? How likely are you to lose money
on the investment?
– Return – What is your expected return on the investment?
– Liquidity – How easy is it to sell the investment if you need to?
– Tax implications – What are the tax implications of investing in this asset?
When you are considering an investment, current yield is just one of many indicators that you need to look at. While it can give you an idea of the income potential of an asset, it does not take into account other important factors such as risk, return, liquidity, or taxes. Conducting a thorough financial analysis on any potential investment is critical to ensuring that your investment decision makes sense for your business.
