Q: What is True Yield?

Q: What is True Yield?

The ‘true yield’ is the effective return on investment (ROI). Using a simplified example, if an investor wants to receive N100,000 after a one-year period (365-days) and choses to invest in a discounted instrument which is offered at a rate of 10%, the investor will pay a discounted value of N90,000 to receive N100,000 at maturity.

The true yield on that investment is not 10.0%. It is in fact 11.1%, calculated as return received as against the initial investment (N10,000/N90,000). This represents the return to the investor if the instrument is held to maturity. 

The discount rate is used to calculate the present value of an investment, which differs from the yield on an investment. 

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