What is a Redemption Yield?

The redeemable rate of return means that the issuer is allowed to redeem the issued bonds at a certain agreed price before the bonds mature. The calculation of the redemption yield is the same as other yields, and it calculates the interest rate that makes the present value of the expected cash flow equal to the bond price.

Redemption yield

Right!

The redeemable rate of return means that the issuer is allowed to redeem the issued bonds at a certain agreed price before the bonds mature. The calculation of the redemption yield is the same as other yields, which is calculated so that the present value of the expected cash flow is equal to

The Commercial Press's English-Chinese Dictionary of Securities Investment explains: redemption yield to call . hold

The first redemption yield is the interest rate that accumulates up to the first redemption date, the interest payment amount and the specified redemption price combined with the present value of the cash flow equal to the bond redemption price. The formula for redemption yield is:

In the formula:

n *-the number of years (years) up to the first redemption date;

M *-the redemption price.

for example:

Both the A and B bonds are 10-year redeemable bonds (the first redemption time is 5 years later), the redemption price is 1100 yuan, and the current yield to maturity of the two bonds is 7%. Among them, bond A has a coupon rate of 5% and B has an interest rate of 8%. Assume that the redemption clause is executed immediately when the present value of the future cash flow of the bond exceeds the redemption price. If the market interest rate drops to 5% after 5 years, what kind of bonds will be redeemed and what is the redemption rate?

Solution: The current value of Bond A is:

When the market interest rate drops to 5%, the value of Bond A rises to 1,000 yuan, and Bond A will not be redeemed.

The current value of Bond B is:

After 5 years the market interest rate drops to 5%, and its value rises to:

At this time, Bond B will be redeemed at a price of 1,100 yuan.

The first redemption yield for Bond B is:

k = 3.96%