Yield return is calculated by dividing the amount received from an investment by the amount initially invested, and then factoring in the duration of the investment (typically expressed in years).
Here's a more detailed breakdown:
Formula:
Yield = (Amount Received / Amount Invested) / Years of Investment
Explanation:
- Amount Received: This is the total amount you get back from the investment at the end of the investment period or upon withdrawal. This includes the initial investment plus any returns (interest, dividends, capital gains, etc.).
- Amount Invested: This is the initial amount of money you put into the investment.
- Years of Investment: The length of time the money was invested, expressed in years. If the investment was held for a period less than a year, the calculation should adjust accordingly (e.g., convert months to a fraction of a year).
Example:
Let's say you invested $1,000 in a bond. After 3 years, you receive a total of $1,150 back.
- Amount Received = $1,150
- Amount Invested = $1,000
- Years of Investment = 3
Yield = ($1,150 / $1,000) / 3
Yield = 1.15 / 3
Yield = 0.05 or 5%
Therefore, the annual yield on this investment is 5%.
Important Considerations:
- Annualized Yield: The formula above calculates the annualized yield. If the investment period is not a full year, you'll need to adjust the calculation to reflect the actual time period.
- Different Types of Yield: There are various types of yield, such as current yield (for bonds) or dividend yield (for stocks), which are calculated differently. This formula provides a general understanding of calculating yield.
In summary, calculating yield return is about determining the profitability of an investment relative to its initial cost and holding period, offering a straightforward way to assess investment performance.
