Redemption Yield

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Definition: Redemption Yield


Redemption Yield


Full Definition of Redemption Yield


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:

  1. Nominal Yield
    This 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%.
  2. 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 = 5.26%. Note that as the market price of a bond drops, its yield goes up.
  3. 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 till 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 (5.26%) and the capital yield (1.05%) = 6.31%.

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Definition Sources


Definitions for Redemption Yield are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th April, 2020 | 0 Views.