BFC2340 Study Guide - Final Guide: Current Yield, Cash Flow, Investment
8 Aug 2018
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The yield on any investment is the interest rate that will make the pv of the investment"s. Cfs equal to the price of the investment. Mathematically, you"re solving for y: (the same method as solving the irr. Calc = enter all cash flows, including the price as a negative, press irr/yr) Keep in mind that the yield calculated is the yield for the period. Hence, if the cfs are semi-annual, the yield is a semi-annual yield. However, if there is only one future cash flow (a zero-coupon bond), we can rearrange the pv formula to calculate the yield: If you"re earning 8% quarterly (2% per quarter), this is not the same as earning 8% per annum. This is because you are earning interest on the interest you receive each quarter. m=frequency of payments per year. Example- if 8% interest is paid quarterly, the periodic interest rate is 8/4=2% per period. Effective annual yield = (1. 02)^4 -1 = 0. 0824 or 8. 24%
