What does the cash flow yield on a portfolio equate to?

The cash flow yield on a portfolio is best defined as the internal rate of return (IRR) on the cash flows generated by that portfolio. This concept refers to the rate at which the present value of cash inflows from the portfolio equals the present value of cash outflows. In simpler terms, it is the discount rate that makes the net present value of future cash flows equal to zero.

The internal rate of return takes into consideration the timing and magnitude of cash flows, which is crucial for accurately assessing the performance of the portfolio. This metric allows investors to evaluate the returns they can expect to earn based on the specific cash flow patterns from their investments. By calculating the IRR, investors can compare the yield of different portfolios or investment opportunities effectively.

Understanding cash flow yield as the IRR is vital for portfolio management, as it aligns with the goal of maximizing returns relative to the timing of cash inflows. This can significantly influence investment decisions, especially when cash flow patterns can vary dramatically across different bond investments or asset classes.

Other choices lack the precision and relevance of this definition. For instance, while the weighted average of yield to maturity (YTM) on bonds might provide a general sense of expected returns, it does not account for the actual