Cryptocurrency Q&A
What are the disadvantages of current yield?
What are the disadvantages of current yield?
CryptoWarrior
Mon Aug 05 2024
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5 answers
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As an investor, I'm curious to understand the limitations of current yield. Could you elaborate on some of the potential disadvantages that investors may encounter when relying solely on this metric to evaluate their portfolio or potential investments? How might it fail to provide a complete picture of an asset's performance or risk profile? Additionally, are there any scenarios where the use of current yield could lead to misguided investment decisions?
5 answers
Chloe_thompson_artist
Wed Aug 07 2024
One of the primary limitations of current yield as a metric for evaluating bond performance is its failure to account for fluctuations in the bond's market price. This oversight can lead to an incomplete picture of the bond's overall performance, as changes in price can significantly impact an investor's return.
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BusanBeautyBloom
Wed Aug 07 2024
Another shortcoming of current yield is its disregard for the bond's time to maturity. Longer-term bonds often carry higher yields to compensate for the increased risk associated with tying up capital for an extended period. Current yield, however, fails to capture this aspect of bond performance.
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Daniela
Tue Aug 06 2024
Moreover, current yield does not take into account the risk of default, which is a critical factor in assessing the safety of a bond investment. The possibility of a bond issuer failing to make promised payments can significantly affect an investor's return, yet current yield ignores this risk.
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MysticEchoFirefly
Tue Aug 06 2024
Additionally, current yield neglects the reinvestment risk associated with bond investments. When interest payments are received, investors face the challenge of finding a suitable reinvestment opportunity that matches or exceeds the original yield. This risk is not reflected in current yield calculations.
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Giulia
Tue Aug 06 2024
Furthermore, current yield fails to consider the tax implications of bond investments. Depending on the investor's tax bracket and the bond's tax status, the after-tax return can vary significantly from the pre-tax yield. This important aspect of bond performance is overlooked by current yield.
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