What is Gross Yield?

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The gross yield of an investment is its profit before taxes and expenses are deducted. Gross yield is expressed in percentage terms. It is calculated as the annual return on an investment (before taxes and expenses) divided by the current price of the investment.

Definition

Gross yield refers to the profit from an investment before taxes and expenses are deducted, expressed as a percentage. It is calculated by dividing the annual return of the investment (before taxes and expenses) by the current price of the investment.

Origin

The concept of gross yield originated from the fundamental need in financial analysis to provide a pure profit indicator unaffected by taxes and expenses when evaluating investment performance. As financial markets evolved, investors required a straightforward method to compare the potential returns of different investments, leading to the widespread use of gross yield.

Categories and Features

Gross yield can be applied to various investment instruments such as stocks, bonds, and real estate. Its main feature is providing a perspective on returns unaffected by taxes and expenses, allowing investors to assess potential returns more clearly. However, gross yield does not account for the impact of taxes and expenses, which may lead to an overestimation of the net returns of an investment in practical applications.

Case Studies

Case 1: Suppose an investor buys a stock at $100 at the beginning of 2023, which rises to $120 by the end of the year and pays a $5 dividend. The gross yield is calculated as (120 - 100 + 5) / 100 = 25%. Case 2: A company issues a bond with a face value of $1,000 and an annual interest of $50. If the market price is $950, the gross yield is (50 / 950) * 100% ≈ 5.26%.

Common Issues

Investors often misunderstand gross yield as the final yield, overlooking the impact of taxes and expenses. Additionally, gross yield does not consider the effect of inflation, which may lead to misjudgment of actual purchasing power.

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