Gross Redemption Yield

Definition§

Gross Redemption Yield (GRY), also known as Effective Yield or Yield to Maturity (YTM), is a measure of the total return an investor can expect to earn if a bond is held until it matures. GRY incorporates all income, including coupon payments, as well as all capital payments due at maturity. Importantly, the calculation does not take into account any taxes payable on the interest and capital repayments. This metric is critical in assessing the attractiveness of bond investments.

Examples§

1. Zero-Coupon Bond Example: Assume you purchase a zero-coupon bond with a face value of $1,000 for $700, and the bond matures in 10 years. The GRY would be calculated as the discount rate that equates the purchase price to the present value of the bond’s future payments.

2. Coupon-Bearing Bond Example: If you buy a bond with a face value of $1,000, a coupon rate of 5%, annual coupon payments, and a purchase price of $950, the GRY would be the discount rate that makes the present value of all future coupon payments and the maturity value of the bond equal to $950.

Frequently Asked Questions§

What is the formula for Gross Redemption Yield?§

The GRY, or YTM, is found by solving the following equation for the discount rate $r$:

$$P = \sum_{t=1}^{n} \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^n}$$

where:

• $P$ = Current bond price
• $C$ = Annual coupon payment
• $F$ = Face value of the bond
• $n$ = Number of years to maturity
• $r$ = Yield to Maturity (YTM)

Is GRY the same as interest rate?§

No, GRY is not the same as the bond’s stated interest rate (coupon rate). GRY provides a comprehensive measure of return, incorporating the coupon payments, the capital gains or losses if the bond is bought at a price different from its face value, and the reinvestment of coupon payments.

How does the Gross Redemption Yield relate to bond pricing?§

The GRY is inversely related to the bond price. When bond prices decrease, GRY increases, reflecting a higher rate of return, and vice versa.

Are taxes considered in the Gross Redemption Yield calculation?§

No, GRY calculations do not consider taxes payable on the interest and capital repayments.

Can GRY change over the life of the bond?§

While the GRY is calculated based on holding a bond to maturity, changes in market interest rates, bond price, and re-investment rates can affect the effective yield realized by the investor.

Related Terms§

Coupon Rate§

The stated annual interest rate paid on a bond, expressed as a percentage of the face value.

Current Yield§

A bond’s annual coupon payment divided by its current price.

Yield Spread§

The difference in yields between different debt instruments, often of different credit quality or maturity dates.

Online References§

• Investopedia: Yield to Maturity (YTM)
• Financial Industry Regulatory Authority (FINRA): Bonds and Interest Rates
• Federal Reserve: Understanding Bond Markets

Suggested Books for Further Studies§

1. “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
2. “Fixed Income Analysis” by Frank J. Fabozzi, CFA
3. “The Handbook of Fixed Income Securities” by Frank J. Fabozzi

Accounting Basics: Gross Redemption Yield Fundamentals Quiz§

Thank you for exploring the concept of Gross Redemption Yield with us. We hope this comprehensive guide and quiz enhance your understanding and proficiency in bond investment metrics!