Methodology

Investing in Bonds

Yield to Redemption

The yield to redemption is the annual return anticipated on a bond investment. It assumes that an investor will hold a bond until its redemption day and reinvest coupon payments. 

The first step is to calculate the running yield, which is the income received on the bond, using the formula: gross coupon % ÷ market price x 100. 

Then you need to calculate capital returns. Firstly, you need to calculate the holding period return using the formula: (price received at maturity – purchase price) ÷ purchase price.

 

Then you need to calculate the annualized return from capital gain/loss, using the formula: holding period return ÷ number of years to maturity.

Finally, you then calculate yield to redemption. You do this by either adding an annualised gain or subtracting an annualised loss from the running yield. I.e. 3% – 0.25% = 2.75% OR 3% + 0.10% = 3.1%. 

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