Get your free $100,000 CFD trading account today
BuyPennyStocks.com - an unbiased resource dedicated to helping investors interested in penny stocks.
Invest in the Future
Advertise with Shareworld now and profit from our future
Click here for more information
Why is it that the required rate of return (yield) of an asset is inversely related to its price? Why is it that the more expensive the asset, the investor will receive less yield? Shouldn't be it the other way round? In that since you paid so much for the asset, you should receive all the more...
Question
Why is it that the required rate of return (yield) of an asset is inversely related to its price? Why is it that the more expensive the asset, the investor will receive less yield? Shouldn't be it the other way round? In that since you paid so much for the asset, you should receive all the more receive more yield? Along the same lines, I also do not understand why is it that if you require/expect a high return on cash flow, you're willing to pay less PV (present value). - Posted by snitched
Answer
ANSWER 28th October
Hi Snitched,
Because it is!!
The return on a bond is fixed (usually). Thus a coupon of 5% will pay £5 interest on every £100 of nominal (face) value. The owner of the bond receives £5 each year. Now suppose general interest rates are 10%: for every £100 you invest you receive £10 interest each year. Why should I pay £100 for the 5% return? If I pay only half its face value (£50 for every £100 nominal) I will still receive the £5 interest but it is then £5 on £50 of investment, which is 10%.
Your second point doesn't seem right but I am not sure I completely understand your point. I see you have this question in the forum, it may be better to have a discussion there. http://www.shareworld.co.uk/index.php/forum/forum/topic/7/380/1/190/
Have you Joined our Investment Forum?
The moderator of our Question and Answer service is an active member in our investment forum and gets involved with discussions in much greater depth. If your not already a member, you can join here, its completely free and it takes a couple of minutes to register.
Add A Comment