1. Market Structure
In finance, market structure refers to the organizational characteristics of a market, including:
- the number and size of participants (like firms and consumers)
- the level of competition
- product differentiation
- ease of entering and exiting the market
Common market structures include:
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
2. Present Value, Yields & Returns
- Present Value (PV): This is the current value of a future sum of money or stream of cash flows, given a specified rate of return (discount rate). PV helps in comparing the value of money now with the value of money in the future.
- Yields: Yield generally refers to the earnings generated and realized on an investment over a particular period. It's usually expressed as a percentage based on the invested amount, current market value, or face value of the security.
- Returns: This refers to the gain or loss of an investment over a period, including income and changes in value, often expressed as a percentage.
Yields vs Returns
Yields
- Definition: Yield generally refers to the income returned on an investment, such as the interest or dividends received from holding a particular security.
- Annual Income: Yield is often expressed as an annual percentage rate based on the investment’s cost, its current market value, or its face value.
- Commonly Used For: Yields are typically associated with fixed-income investments, like bonds. For example, a bond's yield is the interest payments it makes relative to its price.
- Calculation: It's calculated by dividing the annual income (interest or dividends) by the purchase price or current market value of the investment. For example, if a bond pays $50 annually and is purchased for $1,000, its yield is 5%.
Returns
- Definition: Return, on the other hand, refers to the total gain or loss of an investment over a particular period. It includes income (like interest or dividends) and capital gains or losses (the change in the value of the investment).
- Total Performance: Return gives a comprehensive picture of the performance of an investment.
- Commonly Used For: Returns are used for all types of investments, including stocks, bonds, and real estate.
- Calculation: The return is calculated by taking the change in value of the investment, adding any income received from it, and then dividing this total by the original value of the investment. For instance, if you buy a stock for $100, receive $10 in dividends, and sell the stock for $120, your total return is $30 ($20 from the increase in value plus $10 from dividends) on your $100 investment, or 30%.
Key Differences
- Nature: Yield is about the income generated (like interest or dividends) and is usually a part of the total return. Return encompasses both the income and the capital gain or loss.
- Application: Yield is more commonly used when discussing bonds and other fixed-income securities, while return is a broader concept used across all types of investments.
- Time Frame: Yield is typically an annualized figure, whereas return can be calculated for different time frames (like monthly, annually, or over the entire holding period of the investment).
- Understanding these differences is crucial for making informed investment decisions and accurately assessing the performance of different financial assets.
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