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.)


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.