Unlocking the Potential of Your ROI: Understanding Current Yield
Current Yield is an essential metric for investors seeking to evaluate the immediate profitability of their investments. It represents the percentage relationship of annual cash income to the initial investment cost. By understanding this, you can better assess which investments are performing well and which may need reconsideration.
How to Calculate Current Yield:
The formula for Current Yield is:
Current Yield = (Annual Cash Income / Cost of Investment) * 100
Example of Current Yield Calculation:
Let’s consider Abel’s investment scenario for a clearer understanding.
- Investment Property: Abel purchases a parking lot for $10,000.
- Annual Revenue: The parking lot generates $5,000 of parking revenue each year.
- Expenses: Property taxes and insurance amount to $3,500 annually.
- Annual Cash Flow Before Tax: Therefore, Abel’s after-expense annual cash flow is $1,500.
- Current Yield Calculation:
1Current Yield = (1500 / 10000) * 100 = 15%
The Current Yield of this investment is 15%, which allows Abel to understand his return rate on the funds invested.
Difference Between Current Yield and Yield to Maturity:
While Current Yield evaluates the immediate annual returns, Yield to Maturity (YTM) offers a broader perspective by calculating the total expected return from an investment over its lifetime, assuming it is held until maturity. Both metrics can be complementary in deciding whether to hold or sell an investment.
Frequently Asked Questions (FAQs):
1. What does a high current yield mean?
A high current yield typically indicates a high return on investment relative to its cost, which can be appealing for income-focused investors. However, it can also imply higher risk and potential future expenses.
2. Can Current Yield change over time?
Yes, Current Yield can fluctuate based on changes in either the annual cash income or the cost of the investment.
3. How is Current Yield useful in bond investments?
In the context of bond investments, Current Yield helps investors understand the income generated from interest payments relative to the bond’s purchase price, aiding in better investment comparisons.
Related Terms: Yield to Maturity, ROI, Annual Cash Flow.
