Debt Dictionary

Yield

Investment Dictionary -> Yield

Yield or the income return on investment represents interest or dividends acquired from a security. Annually, it is expressed as a percentage, based on the current market value or the investment cost.

In different situations, the term has different meanings. For example, it may be calculated as a ratio or as an IRR (internal rate of return), stating the total return of the owner or just a part of the income. The different meanings show that the yields can not be compared as thought they are equal.

The return on investment measures the cash made or lost in the course of the investment. The measurement shows the income steam or the cash flow resulting from the investment which is relative to the invested amount. The cash flow may take the form of a profit, dividends, interest, or capital loss/gain. The last is observed when the market or the resale value of the investment increases or decreases. The return on invested capital is not included in the cash flow.

Normally used for financial decisions of personal nature, the ROI values include the Annualized Rate of Return and the Annual Rate of Return. The effects of compounding/reinvesting are considered as Certificates of Deposit or savings accounts. The effects of capital loss/gain and price volatility for investments in which capital is at risk are considered by the investor. Examples are stock shares, home purchases, and mutual fund shares.

ROI is also employed in profitability ratios used by analysts for comparing profitability among companies or just the overtime company’s profitability. These include Operating Profit Margin, Gross Profit Margin, Dividend Yield, ROI ratio, Net profit margin, Return on asset and Return on equity.

To select which project to pursue, companies compare the ROI of different projects during the capital budgeting.


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