Investing in Bonds

Yield to Redemption

1

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.

2

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.

3

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.

4

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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