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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
Zoopla: House prices slows to 1.4% in May as rate of sales at four year high
The average UK property now costs £268,400, Zoopla says, but some areas of the country are experiencing much higher price growth than others.
-
FCA reveals 'once in a generation' advice changes - what the reforms mean for you
Consumers to get free access to financial advice type help for pensions and investment following proposed changes from the regulator