Legal Definitions - yield on investment

Yield on investment refers to the financial return or profit generated from an investment, typically expressed as a percentage of the initial amount invested. It is a key metric used by individuals and organizations to assess the profitability and efficiency of their financial decisions over a specific period.

• Example 1: Real Estate Rental Property

  Imagine an individual purchases a rental apartment for $250,000. Over the course of a year, after accounting for all rental income and deducting expenses like property taxes, maintenance, and insurance, the net profit from the property is $12,500.

  This scenario illustrates yield on investment because the $12,500 net profit represents the financial return generated from the initial $250,000 investment. To calculate the yield, one would divide the net profit by the initial investment ($12,500 / $250,000 = 0.05), resulting in a 5% yield on investment for that year. This percentage helps the owner understand the profitability of their real estate venture.

• Example 2: Corporate Bond Investment

  A pension fund invests $1,000,000 in corporate bonds issued by a large technology company. These bonds pay a fixed interest rate of 4% annually. Over one year, the pension fund receives $40,000 in interest payments from these bonds.

  Here, the $40,000 in interest payments represents the yield on the pension fund's investment. The yield on investment is calculated as the annual interest received divided by the initial investment ($40,000 / $1,000,000 = 0.04), which is 4%. This figure indicates the consistent return the fund earns from holding these debt instruments.

• Example 3: Small Business Technology Upgrade

  A graphic design firm invests $20,000 in new, high-performance computer equipment and specialized software. In the first year after the upgrade, the firm finds that it can complete projects 25% faster, leading to an additional $5,000 in revenue from taking on more client work, and saves $1,000 in outsourcing costs due to the new capabilities.

  This demonstrates yield on investment by showing the financial benefit derived from the business's capital expenditure. The total financial gain ($5,000 increased revenue + $1,000 cost savings = $6,000) is the return on their $20,000 investment. The yield is ($6,000 / $20,000 = 0.30), or 30%, indicating a strong return on their technology upgrade.