Redemption Yield: The Total Return from a Bond If Held Until It Matures

Redemption yield, also known as yield to maturity (YTM), is the total annual return an investor can expect to earn from a bond if it is held until its maturity date and all interest payments (coupons) are received as scheduled.
It takes into account both the interest income and any capital gain or loss that occurs if the bond was bought at a price different from its face value.

In simple terms, redemption yield shows the true rate of return on a bond over its full life, assuming no default and that all payments are made on time.

Core Idea

When investors buy bonds, they earn money from two sources:

Regular coupon payments (interest income), and

The difference between the purchase price and the redemption (face) value.

The redemption yield combines both effects to show the average annual return an investor earns from holding the bond until maturity.
It’s one of the most important measures used to compare bonds with different prices, coupons, and maturities.

In Simple Terms

If you buy a bond today and hold it until it matures, the redemption yield tells you the overall yearly return you’ll earn, including both interest and any price difference when it’s repaid.

Example

You buy a 5-year bond with:

A face value of £1,000

An annual coupon rate of 6% (£60 per year)

A market price of £950

Since you paid £950 but will receive £1,000 at maturity, you gain £50 in addition to your yearly interest payments.
The redemption yield includes both your coupon income and this extra £50 profit, averaged out over the 5 years.

The resulting return will be slightly higher than 6%, because you also gain from the bond’s discount price.

If instead you bought the same bond at £1,050, the redemption yield would be lower than 6%, since you’d lose £50 at redemption.

Formula (Simplified)

Redemption yield is found by solving this equation for the yield
𝑌
Y:

𝑃
=
∑
𝑡
=
1
𝑛
𝐶
(
1
+
𝑌
)
𝑡
+
𝑅
(
1
+
𝑌
)
𝑛
P=
t=1
∑
n
​

(1+Y)
t
C
​

+
(1+Y)
n
R
​

Where:

𝑃
P = current market price of the bond

𝐶
C = annual coupon payment

𝑅
R = redemption (face) value

𝑛
n = number of years to maturity

𝑌
Y = redemption yield

Because this equation involves discounting future payments, it’s usually calculated using a financial calculator or spreadsheet.

Real-Life Application

Redemption yield is used by:

Bond investors, to evaluate whether a bond’s return is attractive compared to others.

Portfolio managers, to assess income potential and compare fixed-income instruments.

Analysts, to estimate the fair price of bonds under different interest rate scenarios.

It is particularly useful for comparing bonds trading at premiums or discounts, as it reflects the total return, not just the coupon rate.

Key Points to Remember

If a bond is bought below par, redemption yield is higher than the coupon rate.

If bought above par, redemption yield is lower than the coupon rate.

It assumes the bond is held to maturity and that the issuer does not default.

It includes both income and capital components, giving a complete picture of return.

Common Misconceptions and Mistakes

“Coupon rate equals redemption yield.” The coupon rate shows only annual interest, not total return including price effects.

“Yield stays constant.” Redemption yield changes when bond prices move due to interest rate shifts.

“It applies only to government bonds.” It’s used for all fixed-income securities.

“It’s easy to calculate manually.” Exact calculation requires solving for yield using iterative or computational methods.

Related Queries Investors Often Search For

What is the difference between coupon rate and redemption yield?

How do you calculate redemption yield?

Why is redemption yield important in bond investing?

How does bond price affect redemption yield?

What happens to yield when interest rates rise?

Summary

Redemption yield (or yield to maturity) is the total annual return an investor earns from a bond if it’s held until maturity, accounting for both coupon payments and any price difference between purchase and redemption.
It’s a key measure for comparing bond investments and understanding the real return after considering both income and capital effects.