0
$\begingroup$

Let's say a bond has a face value of £$100$ with semi-annual coupons at a rate of $3$% p.a which is redeemable at par in $10$ years. Assume an investor purchases the bond for £$92$ on the day it is issued. If at the maturity the investor pays capital gains taxes at $22$%, what is the net redemption yield?

So I've set up this equation for the price (£92) of a bond using the fact that the $\text{semi-annual coupon rate}=0.015$, $n=20$, the $\text{net payment at maturity} = 98.24$ and $i/2$ is the net redemption yield :

$92 = 0.015\times100\times(1-(1+(i/2))^{-20})/(i/2) + 98.24\times(i/2)^{-20}$

The questions asks me to find the answer $i = 3.83$ via interpolation methods, but I'm not sure how to approach this, nor am I confident that my equation is correct. Is there any difference between redemption yield and yield rate? Any help/ pointers would be appreciated.

(Apologies for the bad formatting but I can't seem to figure out the right way.)

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.