The redemption yield refers to the return that an investor can expect to receive if they hold a bond until it matures. It is a calculation that factors in both the annual interest payments received and the gain or loss in the bond’s value at the time of maturity.
It takes into account not just the income an investor receives through the bond’s interest payments, but also any capital gain or loss made when the bond is redeemed, or paid back, by the issuer at the end of its term. The redemption yield is used as a way to compare the total returns of different bonds.
1. What is a Bond?
A bond is a type of investment that involves lending money to an organization, typically a government or a corporation, for a fixed period of time at a fixed rate of interest. In return, the organization promises to repay the loan by a specific date and pays you interest at regular intervals.
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2. How Does a Bond Work?
Bonds work by providing investors with a form of income through regular interest payments. When you purchase a bond, you are essentially lending money to the issuer. In return, the issuer promises to pay you a specified rate of interest throughout the life of the bond and then return the principal (the original loan) on the bond’s expiration date.
3. What is Yield to Maturity (YTM)?
The yield to maturity (YTM) is the total return expected on a bond if it is held until maturity. It counts not only the interest payments but also any capital gain (or loss) that may happen when the bond matures.
4. How is Redemption Yield Calculated?
The redemption yield is calculated by taking into account the bond’s purchase price, amount of interest payments, the bond’s face value, and the time until maturity. Generally, a complex mathematical formula is applied to calculate this yield, which can be done using online tools.
5. Why is Redemption Yield Important?
The redemption yield is important as it gives an investor a more comprehensive understanding of the potential returns from a bond. It provides a measure to compare among bonds with diverse characteristics like varying coupon rates, maturity periods, and prices. Thus, helping in making more informed investment decisions.