The level of risk you are willing to accept ultimately determines the yield of your investment. A higher level of risk will generally provide you with a higher yield. On the other hand, a low level of risk will result in a lower yield on your investment.
In some cases, you choose to invest in an investment with a higher level of risk to gain a higher yield.
Considering the Maturity of Investments
Maturity is the term used to describe the length or the duration of your investments. Many investments are made to be held over a certain period of time. An investment that is referred to as having been held to maturity. When an investment has reached its maturity, the original investment and any gains or losses earned by the investment are returned payday cash loans Amelia to the investor.
The maturities of your investments should occur so that the surplus cash is available when your business needs it. Preparing a cash flow budget is the best way for you to determine the appropriate maturities for your investments in light of your future cash inflows and outflows.
As a general rule, you should try to stagger the maturities of your investments so all your cash isn’t tied up waiting for one investment to reach maturity. Investments that mature at a time when your business does not require the surplus cash can always be easily reinvested.
The maturity of your investments has a direct impact on the yield of your investment. A longer maturity will generally provide you with a higher yield. On the other hand, an investment with a shorter maturity or no maturity at all will result in a lower yield on your investment.
Considering the Liquidity of Investments
Liquidity describes how easily you can access the cash you put into an investment. The liquidity of investments varies greatly.
For example, investing your cash surplus in a money market account is very liquid. You can pull cash from a money market account when you need it without incurring any penalties for withdrawing the funds, although you may need to maintain a minimum balance. Other investments offer less liquidity and have penalties for withdrawing early, such as a certificate of deposit (CD) penalizes the holder for early withdrawal.
When investing your cash surplus, be sure to consider the investment’s liquidity. If the amount and duration of your cash surplus are uncertain, then you should consider only those investments that offer a high level of liquidity. On the other hand, if the amount of your cash surplus and the duration of the surplus are fairly certain, then less liquid investments should be considered. Preparing a cash flow budget should help you determine the amount and the duration of your cash surplus.
The liquidity of your investments also affects the yield of your investment. An investment that is highly liquid, such as a checking money market account, will generally result in a lower yield on your investment. On the other hand, an investment with a low level of liquidity, such as a CD, will generally provide you with a higher yield.
Yields of Various Types of Investment
Yield is the last factor to consider when making your cash surplus investment decisions, but it’s certainly not the least important. For most investments, the yield is determined by three other factors: risk, maturity and liquidity.
Once you’ve determined your acceptable level of risk, maturity and liquidity, the type of investment and the yield of the investment are pretty much determined for you, or at least you’ve narrowed your options.