Bond yields

An investor buying a bond needs to know what return to expect.

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.

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
How to stop recurring subscriptions becoming a drain on your money
Personal finance

How to stop recurring subscriptions becoming a drain on your money

Tracking and pruning subscriptions isn’t as easy as it sounds. Here's how to take charge.
14 Sep 2021