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Redemption yield |
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Redemption yieldYield 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%.Similar MatchesRedemptionRedemptionThe process of canceling a defeasable title to land, such as is created by a mortgage foreclosure or tax sale. RedemptionRedemptionThe re-purchase of a security, such as a bond or preferred stock, by the issuing company at or before maturity. Redemption PeriodRedemption PeriodA time period during which a mortgage, landcontract, deed of trust, etc., can be redeemed. Usually set by statute, and after judicial foreclosure. Overhanging redemption penaltyOverhanging redemption penaltyAn early redemption charge that lasts beyond the benefit period is referred to as an extended or overhanging redemption penalty. These should be avoided where possible. Mandatory redemption scheduleMandatory redemption scheduleSchedule according to which bond sinking fund payments must be made. Further Suggestionsredemption feesRedemption price Right of redemption Redemption cushion redemption price gross redemption yield Redemption penalty overhang Serial redemption Redemption Redemption charge redemption date Redemption penalties Redemption statement Extended redemption penalty Preferred equity redemption stock (PERC) right of redemption Redemption date Redemption Redemption fee |
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