Gross Redemption Yield: Calculation & Understanding

The gross redemption yield of a security holding is a calculation of expected income and capital growth for the period of time to the maturity date of the security. The purpose of this calculation is the reveal the full return of a security if it is held until the maturity date.

Step 1

Determine the current yield of the income by dividing the annual income by the current market price of the security and multiplying by 100.

Example: 10 / $50 x 100 = 20 percent (10 is the annual income; $50 is the current market price; 100 is the fixed factor to determine percentage; 20 percent is the current yield of the income)

Step 2

Calculate the amount of the discount or premium of the yield by subtracting the current market price of the security from the full value of the bond upon the maturation date.

Example: $75 - $50 = $25 ($75 is the full value of the security upon the maturation date; $50 is the current market price; $25 is the discount)

Step 3

Determine the annual gain of the security by dividing the number of years left by the discount calculated in Step 2.

Example: 10 / $25 = 40 cents (.4) (10 is the number of years left on the security until maturity; $25 is the amount of the discount; 40 cents is the annual gain of the security)

Step 4

Determine the current yield of the capital gain or loss by dividing the amount of the discount or the premium by the annual gain of the security.

Example: 4 cents (.4) / $25 x 100 = 1.6 percent (40 cents is the annual gain of the security; $25 is the discount; 100 is the fixed factor to determine percentage)

Step 5

Add the current yield of the income calculated in Step 1 to the current yield of the capital gain or loss calculated in Step 4. This will give you the gross redemption yield.

Example: 20 percent + 1.6 percent = 21.6 percent (20 percent is the current yield calculated in Step 1; 1.6 percent is the current yield of the capital gain or loss calculated in Step 4; 21.6 percent is the gross redemption yield)