Business, Legal & Accounting Glossary
Rate of return is a synonym for yield. It usually refers to an annual percentage yield on an investment.
Rate of return is a synonym for yield. It usually refers to an annual percentage yield on an investment.
The rate of return is the percentage gain or loss of an investment over a period of time. Rate of return is often expressed as an annual percentage; for example, an annual rate of return of 5 per cent means the investment gained 5 per cent over a twelve-month period.
The rate of return is based on the change in the value of the underlying asset, adjusted for payouts. A bond, for example, has a rate of return equal to the total interest paid by the bond adjusted for changes in the price of the bond itself. The rate of return of a stock is the change in price adjusted for any dividends. With mutual funds and other pooled investments, the rate of return must also account for any capital distributions.
The rate of return is what an investment pays back, usually on an annual basis.
However, there are a couple of specialized uses of this phrase.
In calculating an intrinsic value of a company through valuation models such as the dividend discount model or discounted cash flow model, one of the terms required is the “discount rate.” This is the rate used to convert future dollars back into present dollars, arising out of the time value of money.
The discount rate is also the rate of return expected by the investor. If you buy stock of Nike with the expectation of earning an average of 10% per year, then that is your expected rate of return as well as the discount rate you would apply when calculating an intrinsic value of Nike.
This is the rate of return a portfolio earns per year, taking into account the growth (or not) of the value of the holdings of the portfolio, as well as any cash paid in or withdrawn from the portfolio by the portfolio owner (which does not include dividends). It can either be dollar-weighted, which accounts for the timing of cash flows in and out, or time-weighted, which gives a measure of the actual performance of the underlying investments.
Yield
Discount rate
Internal rate of return
Return
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This glossary post was last updated: 29th November, 2021 | 0 Views.