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When investors buy different securities, they want to be able to compare expected annual returns. For bonds this is the ‘redemption yield’ or ‘yield to maturity’. It reflects the annual income and expected capital gain or loss from holding the bond.
Say you hold a 6% corporate bond priced at £95, due to be redeemed in four years’ time. The income, or ‘flat’, yield is 6/95 x 100, or 6.3%. This is sometimes flagged in newspapers as ‘FY’. But the published gross (pre-tax) redemption yield, or ‘GRY’, will be higher, say, 7.6%.
This reflects the annual income from the bond and the fact that if you pay £95 for the bond now you’ll make a small capital gain on top between now and redemption at £100 in four years’ time.
