What does the flat yield method ignore in its calculations?

The flat yield method primarily focuses on the straightforward annual income generated by a bond without taking into consideration the time value of money. This means that it treats all cash flows as if they are to be received at the same time, rather than recognizing that a dollar received in the future is worth less than a dollar received today due to factors like inflation and opportunity cost.

As a result, the flat yield only calculates the yield based on the nominal cash flows, such as annual coupon payments and the principal amount upon redemption, and it does not discount future cash flows back to their present value. In this framework, the method lacks a comprehensive approach to value the investment accurately over time, which is essential for understanding the true return on a bond. Thus, the flat yield method's omission of the time value of money makes it less precise when assessing an investment's overall performance and risk.