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hi
can you please explain to me how should I calculate reedemption yield?”A company has in issue $200000 8% loan stock quoted of 92pc, reedemable in 5 years time at par.
company tax at the rate of 30%”What is the reedemption yield?
You cannot be expected to calculate the redemption yield (and if you are referring to a question in our mock exam, then it doesn’t need calculating – I will explain why after).
You are expected to know what the redemption yield is, and it is dealt with in our free lectures (which I assume you have watched? Our lectures are a complete course for paper F9 and cover everything you need to pass the exam well.)
The interest yield is 8/92 = 8.70%. However this ‘return’ is only considering interest (coupon rate) of 8 payable each year, and ignores any gain or loss on redemption (the difference between the redemption amount and the current market value).
In this question, the current market value is 92 but they will be repaid at 100. This means that the overall return to investors (which is the redemption yield) will be a bit more that 8.70%.
However, although you could be expected to know that for this question it is more than the interest yield of 8.70%, you cannot be expected in paper F9 to actually put a figure on it.
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