The work of any investor in the securities market is closely related to risk. However, the higher the risk of each trade, the higher the level of profitability. Mathematically, the profitability of a security is expressed in relation to the income received to the cost of acquiring it.
Instructions
Step 1
A security is a commodity that has a value. However, unlike the actual product, it does not carry any material value. The purchase and sale of a security is the conclusion of a transaction between a buyer and a seller on the stock market, which is expressed in the transfer of rights and the emergence of obligations.
Step 2
The return on a security is expressed in the buyer's right to receive income. This value is the percentage between future income and funds spent. For clarity, the profitability is presented in the form of a rate of return, which is called the dividend (the sum of interest), which the investor receives at the end of each settlement period (month, quarter, year).
Step 3
The investor's annual income is formed as a result of focusing on the growth of the price of securities and depends on the amount of the initial investment. The yield on securities is calculated to assess the effectiveness of investment in order to identify the most profitable way of placing money.
Step 4
In general, the return on a security is calculated by the formula: d = (S_n - S_0) / S_0, where S_0 is the initial cost of the securities, S_n is the final cost, d is the rate of return expressed as a percentage.
Step 5
The dividend annual yield of a security is defined as the ratio of the amount of the dividend per share to its value. The annual interest rate is characterized by the application of the compound interest method and is calculated by the formula: d = (1 + i / n) ^ n - 1, where i is the nominal compound interest rate for the year, n is the number of periods of the year for which compound interest is calculated. the percentage yield is calculated once a year, but the formula gives the accrued value that a share would have if interest were accrued at the end of each period.
Step 6
The current yield is equal to the sum of the coupon payments on the security for the year, divided by its current market value. This indicator of profitability is rarely used, since it does not reflect some important features, for example, it does not take into account the investor's risk when buying securities.
Step 7
Internal rate of return, or internal rate of return, is the percentage rate at which the present value of the future cash flow for a given share matches its market price. To calculate it, the following formula is used: d = (k + (N - P) / t) / ((N + P) / 2), where k is the annual coupon rate, N is the par share price, P is its current market price, t - maturity in years. In relation to bonds, this indicator is called the yield to maturity, while it is assumed that the internal rate of return will remain unchanged throughout the entire period.
