Final answer:
The yield on an investment refers to earnings from interest, dividends, or appreciation. Yield is expressed as a percentage and can include interest payments from bonds, dividends from stocks, or capital gains from selling assets at a higher price. Understanding yield helps investors make informed decisions.
Step-by-step explanation:
The yield on an investment might be in the form of interest, dividends, or appreciation. The term 'yield' refers to the earnings generated and realized on an investment over a particular period of time. It is expressed generally as a percentage based on the invested amount, the current market value, or the face value of the security. There are several ways an investor can generate a return on their investment:
- Interest is typically earned on investments like savings accounts, certificates of deposit (CDs), and bonds. A bondholder, for instance, would receive regular interest payments.
- Dividends are distributed by companies to their shareholders from the company's earnings.
- Appreciation refers to an increase in the value of an investment, such as when shares of stock or real estate are sold at a higher price than they were purchased, which is known as a capital gain.
Understanding how assets yield returns is crucial for making informed investment decisions. For example, bonds are financial contracts promising to repay the borrowed amount with interest. The actual rate of return on investments can include a combination of interest payments and capital gains. When choosing financial products, prospective investors assess the expected rate of return, taking into consideration potential interest and appreciation.