Understanding Yield Basis in Trading
Yield Basis is a significant term in the world of trading and finance. It's essential for new investors to grasp the concept of Yield Basis. In layman's terms, Yield Basis refers to the difference between the yearly income from an investment and the price initially paid for that investment. Investment yield is reported as an annual percentage rate.
The Mechanism of Yield Basis
The function of the Yield Basis is to reflect what an investor will earn relative to the cost of the investment. It is calculated by dividing the annual income from an investment by the original cost and then converting this into a percentage. This demonstrates the returns the investor can expect on an annual basis. The higher the Yield Basis, the better the returns from an investment.
Example: Yield Basis in Real Life Trading
To understand Yield Basis better, let's consider an example. Assume you bought a bond for $1000 that pays $60 every year in interest. To find the Yield Basis, divide $60 (annual income) by $1000 (initial cost). Multiply this result by 100 to express it as a percentage. In this case, the Yield Basis would be 6%. This indicates that every year, you earn 6% of what you initially invested.
Why is Yield Basis Important in Trading?
Yield Basis provides a robust measure of an investment's profitability and is especially useful when comparing different investments. It helps investors make well-informed decisions and maximizes their potential returns. Notably, different types of investments (e.g. bonds, stocks, real estate) have different methods of calculating Yield Basis due to their unique return structures. Therefore, understanding Yield Basis is a must for any trading strategy.
