Bond yields

An investor buying a bond needs to know what return to expect. The flat yield (FY) focuses on income – it’s the annual coupon as a percentage of the bond’s price. So if a four-year bond costs £96 and pays an annual coupon of 6% (always a percentage of the bond’s face or par value of £100), the flat yield is (6/96) x 100%, or 6.25%.

But that ignores the fact that you pay only £96 for a bond that can be cashed in later for £100 – in other words, there’s a future capital gain to consider too. The gross redemption yield (GRY) builds this in. The exact calculation is complex. As a rough guide, you could say the investor will make a £1 capital gain, i.e. (£100-96)/4, every year. So the GRY is more like (6+1)/96, or about 7.3%.

• See Tim Bennett’s video tutorial: Bond basics.

MoneyWeek magazine

Latest issue:

Magazine cover
Party's over for Putin

The only portfolio safe from Russia's rout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


19 December 1932: BBC World Service begins

The first royal Christmas message by George V gave the fledgling World Service an early boost six days after it was founded in 1932.