Redemption yield - An estimate of the total long term returns, including income and capital, on fixed income investments like corporate bonds and gilts.
Yield calculations on bonds aim to show the return on a gilt or bond as a percentage of either its nominal value or its current price. There are three types of yield calculation that are commonly used:Nominal YieldThis is calculated by dividing the annual income on the bond by its nominal or "par" value. So the nominal yield on a £100 bond which pays 5% interest per year is 5/100 x 100 = 5%.Current or "Running Yield"This is calculated by dividing the annual income on the bond by its current market price. So if the market price of the £100 bond dropped to £95, the current yield on the bond at that time would be 5/95 x 100 = 5.36%. Note that as the market price of a bond drops, its yield goes up.Redemption Yield"The Redemption Yield shows what the total return on a bond would be if held to its maturity date. It reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures. The income element is the same "current yield" calculation performed above. The gain/loss element is calculated by taking the difference between the current market price and the nominal value of the bond (e.g. in our example 100 - 95 = 5), dividing it by the number of years til maturity (assume 5 years for simplicity, so 5/5 = 1) and then dividing that figure by the current price of the bond (1/95 x 100 = 1.05%) The yield to redemption is the sum of the current yield (5.36%) and the capital yield (1.05%) = 6.41%.
Redemption yield : an estimate of the total long term returns, including income and capital, on fixed income investments like corporate bonds and gilts.
yield calculations on bonds aim to show the return on a gilt or bond as a percentage of either its nominal value or its current price. there are three types of yield calculation that are commonly used:nominal yieldthis is calculated by dividing the annual income on the bond by its nominal or "par" value. so the nominal yield on a £100 bond which pays 5% interest per year is 5/100 x 100 = 5%.current or "running yield"this is calculated by dividing the annual income on the bond by its current market price. so if the market price of the £100 bond dropped to £95, the current yield on the bond at that time would be 5/95 x 100 = 5.36%. note that as the market price of a bond drops, its yield goes up.redemption yield"the redemption yield shows what the total return on a bond would be if held to its maturity date. it reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures. the income element is the same "current yield" calculation performed above. the gain/loss element is calculated by taking the difference between the current market price and the nominal value of the bond (e.g. in our example 100 - 95 = 5), dividing it by the number of years til maturity (assume 5 years for simplicity, so 5/5 = 1) and then dividing that figure by the current price of the bond (1/95 x 100 = 1.05%) the yield to redemption is the sum of the current yield (5.36%) and the capital yield (1.05%) = 6.41%.
Redemption yield