As a business owner, you are always looking for ways to improve your bottom line. One way to do this is to invest in assets that will generate income. When you are considering an investment, one of the key indicators that you will look at is the current yield. In this blog post, we will explain what current yield is and how it relates to financial analysis.
Current Yield Defined
Current yield is a ratio that measures the annual income from an investment divided by the current market price of the investment. The current market price is the price that you would pay for the asset today.
For example, let’s say that you are considering investing in a bond with a par value of $1,000 that pays interest semi-annually. The bond has a coupon rate of 5% and matures in 10 years. The current market price of the bond is $950. The current yield on the bond would be:
Annual interest income/$950 = 0.0526 or 5.26%
How Does Current Yield Relate to Financial Analysis?
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.
-Rick Adams Current Yield Blog Post
