- This topic has 3 replies, 2 voices, and was last updated 3 years ago by
.
- Posts
- Topics: 44
- Replies: 26
- ☆☆
Could you please tell me the difference between interest yield and redemption yield? And how the redemption yield is calculated?
I know that interest yield is a formula used to calculate irredeemable debt which has no redemption; But is it true that redemption yield can be calculated through the IRR method just like the way we calculate redeemable debt?
In your lecture, you said that we are tested on this part in the exam but I really want to know how to calculate redemption yield, please explain with an example!
The redemption yield is the overall return to investors which is calculated as the IRR of the pre-tax returns to the investors (interest and the redemption).
I work through examples of the calculation in my free lectures.
- Topics: 44
- Replies: 26
- ☆☆
1) You mean to say that redemption yield is the overall return to investors which is actually the market value of debt such as explained in Chapter 12 (example 10, 11, 12) where we have calculated the market value of the debt through IRR of the pre-returns to the investors (interest and the redemption)?
2) Correct me that:
Interest Yield is the return to investors each year because it has no redemption date so the return is each year will be the same every year;
While Redemption Yield is an overall rate of return to investors on maturity because it has a redemption date.
3) Please tell me why the pre-tax return is calculated through before-tax cost of capital and not after-tax cost of capital?
4) What I said about interest yield & redemption yield in my second paragraph in the earlier question is correct?
1. The market value of debt is not a return. It is the required return that determines the market value. If we know the market value and we know the interest and redemption flows, then the required return (the redemption yield) is the IRR of the flows.
2. The interest yield is the annual interest as a % of the market value (whether redeemable or irredeemable). If the debt is irredeemable then it is the same as the overall required return.
3. The return to investors is the same. as the pre-tax cost of capital because the investors are not affected by company tax. Tax is only relevant when calculating the cost to the company,
4 is answered in my previous three answers.
I do suggest that you watch the lectures again, because all the above is explained in the lectures 🙂
- You must be logged in to reply to this topic.