Bond yields are core R02 territory, and the exam consistently tests two of them:
- Running yield — the income return you get right now
- Redemption yield — the total return if you hold to maturity (also called yield to maturity or YTM)
Get the difference clear and you'll bank easy marks every sitting.
Running yield (the easy one)
Running yield = (Annual coupon ÷ Current market price) × 100
It tells you the income your money is earning at today's price, ignoring any capital gain or loss when the bond matures.
Quick example
A 5% coupon gilt is trading at £110. Coupon is £5 per £100 nominal.
Running yield = 5 ÷ 110 × 100 = 4.55%
Because you paid a premium (£110 for a £100 bond), the running yield drops below the coupon rate.
Redemption yield (the one R02 loves)
The full redemption yield is technically the IRR of the bond's cash flows. The CII R02 exam uses the simplified gross redemption yield approximation, which you should memorise:
GRY ≈ [ C + (F − P) ÷ n ] ÷ [ (F + P) ÷ 2 ] × 100
Where:
| Symbol | Meaning |
|---|---|
| C | Annual coupon (£) |
| F | Face/redemption value (usually £100) |
| P | Current market price (£) |
| n | Years to maturity |
Worked example
A 4% coupon bond is trading at £95, redeems at £100 in 5 years.
Step 1 — Annual capital gain spread over time: (100 − 95) ÷ 5 = £1 per year. Step 2 — Numerator: 4 + 1 = £5. Step 3 — Average price: (100 + 95) ÷ 2 = £97.50. Step 4 — Divide and multiply: 5 ÷ 97.50 × 100 = 5.13%.
So the gross redemption yield ≈ 5.13%.
How to spot which one R02 wants
| Wording | Yield |
|---|---|
| "Income return", "current yield", "interest yield" | Running yield |
| "Total return if held to maturity", "GRY", "YTM" | Redemption yield |
| "Net redemption yield" | Redemption yield × (1 − tax rate) on the income portion |
Quick sanity-checks
- Bond at par (P = F) → running yield, redemption yield, and coupon are all the same.
- Bond at a discount (P < F) → redemption yield > running yield > coupon.
- Bond at a premium (P > F) → redemption yield < running yield < coupon.
If your answer breaks one of these orderings, you've made an arithmetic error.
Common R02 traps
- Using nominal coupon instead of £-amount. If the question says "5% coupon, £100 nominal", the £-coupon is £5.
- Forgetting (F − P) can be negative. If you bought at a premium, the capital element is a loss and reduces the redemption yield.
- Dividing by P instead of average price. Running yield uses P; redemption yield uses (F + P) ÷ 2.
- Mixing gross and net. R02 occasionally asks for net redemption yield — only the income (coupon) portion gets taxed; the capital gain on a gilt is exempt for individuals.
Where this fits in R02
These two yields sit in the fixed-interest securities chapter alongside duration, credit risk, and the inverse price/yield relationship. Once you can compute both yields in under 90 seconds, the rest of the bond chapter slots into place.