Gross redemption yield

The continuously compounded gross redemption yield at time ton a default-free zero-coupon bond that pays 1 at maturity date 7 is x. We assume that the movement in X is described by... 

Applying the indexation lag, this allows us to calculate estimated nominal values of all future cash flows which, knowing the current dirty nominal price, P, allows us to solve for an internal (nominal) rate of return—a nominal, semi-annual, gross redemption yield, y. Having applied our 3% inflation assumption, /, to get nominal future payments, we now remove it from the nominal yield using the simple formula... 

After the close of business each day the DMO publishes reference prices and the equivalent gross redemption yields for each gilt on its news screens. The final reference price is based on closing two-way prices supplied by each GEMM at the end of the day. The prices, previously referred to as CGO reference prices but now following the merger of the CGO with CREST, called DMO or gilt reference prices, are frequently used in the calculation of settlement proceeds in repo and stock loan transactions. 

In the past bond analysis was frequently limited to calculating gross redemption yield, or yield to maturity. Today basic bond math involves different concepts and calculations. These are described in several of the references for chapter 3, such as Ingersoll (1987), Shiller (1990), Neftci (1996), Jarrow (1996), Van Deventer (1997), and Sundaresan (1997). This chapter reviews the basic elements. Bond pricing, together with the academic approach to it and a review of the term structure of interest rates, are discussed in depth in chapter 3. 

The discussion so far has involved calculating the price of a bond given its yield. This procedure can be reversed to find a bond s yield when its price is known. This is equivalent to calculating the bond s internal rate of return, or IRR, also known as its yield to maturity or gross redemption yield... 

Consider a bond with a dirty price—including the accrued interest the seller is entitled to receive—of 97.89, a coupon of 6 percent, and five years to maturity. FIGURE 1.6 shows the gross redemption yields this... 

FIGURE 16.10 shows the cash flow for the Treasury s principal strip. Its yield is 4.0751 percent, corresponding to a price of 67.10027 per 100 nominal, which represents a spread above the gross redemption yield of the coupon Treasury. This relationship is expected, given a positive yield... 

To differentiate redemption yield from other yield and interest rate measures described in this book, it will be referred to as rm. Note that this section is concerned with the gross redemption yield, the yield that results from payment of coupons without deduction of any withholding tax. The net redemption yield is what will be received if the bond is traded in a market where bonds pay coupon net, without withholding tax. It is obtained by multiplying the coupon rate Cby (1 — marginal tax rate). The net redemption yield is always lower than the gross redemption yield. 

FIGURE 16.4 Gilt Market Gross Redemption True Yields and Imnllad Soot Yields on March 2. 1999 ... 

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