Equivalent yield is a concept used in finance related to the comparison of investments that have different cash flows. It is a measure of the rate of return on an investment that has an unequal cash flow over the life of the investment. The equivalent yield is calculated by taking the total present value of the cash flows and dividing it by the initial investment.
The concept of equivalent yield is used to compare investments with different cash flows and to determine which investment provides the highest return. For example, if an investor is considering two investments, one with a fixed cash flow and one with a variable cash flow, the equivalent yield can be used to determine which investment provides the highest return. The equivalent yield takes into account the timing of the cash flows and the present value of the cash flows, which allows for a more accurate comparison of the returns on the two investments.
The equivalent yield is also used to compare investments with different maturities. For example, if an investor is considering two investments, one with a shorter maturity and one with a longer maturity, the equivalent yield can be used to determine which investment provides the highest return. The equivalent yield takes into account the timing of the cash flows and the present value of the cash flows, which allows for a more accurate comparison of the returns on the two investments.
Equivalent yield is a useful tool for investors who are trying to compare investments with different cash flows and maturities. It allows investors to compare the returns on investments with different cash flows and maturities and make more informed decisions about which investments to pursue.