Redemption yield is the amount an investor will get on a bond if the investor holds the bond until its maturity date. A bond will pay interest until the bond matures. Once the bond matures, the investor will also receive the face value of the bond. The redemption yield takes into account interest earned on the bond and income or loss on the bond. For example, a £65,000 bond pays £1,950 of interest a year. The current market value is £63,050. The bond matures in three years.
- Skill level:
Determine the current yield by dividing the interest per year by the current market price. In our example, £1,950 divided by £63,050 equals 3.09 per cent.
Calculate the gain or loss element by subtracting the current market price from the bond's nominal value, then dividing it by the years until maturity. Finally, divide by the current market price and multiply by 100. In our example, £65,000 minus £63,050 equals £1,950, then £1,950 divided by 3 years equals £650. Then £650 divided by £63,050, which equals 0.0103. Finally, 0.0103 equals 1.03.
Add the gain or loss element to the current yield. In our example, 3.09 plus 1.03 equals 4.12.
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