Running Yield vs Redemption Yield
Running Yield vs Redemption Yield
In UK and Commonwealth bond markets, "running yield" means current yield (annual coupon divided by price), and "redemption yield" means yield to maturity. These are the local terms; the underlying concepts are identical to U.S. bonds, but the terminology differs.
Key takeaways
- Running yield is the annual coupon payment divided by the bond's current price (same as U.S. current yield)
- Redemption yield is the internal rate of return if you hold to maturity (same as U.S. YTM)
- UK gilts, Irish bonds, Australian bonds, and other Commonwealth debt use these terms
- Running yield tells you the income; redemption yield tells you the total return including capital gain or loss
- A bond trading at a discount has a running yield lower than its redemption yield (the opposite of the relationship between price and yield)
Running yield explained
Running yield is used in UK and Commonwealth bond markets as the equivalent of U.S. current yield. It is the annual coupon payment divided by the clean price.
Running yield = Annual coupon / Current price
For a UK gilt with a £100 par (gilts are often quoted with par of 100), a 3% coupon, and a market price of 95:
Annual coupon = 3% of 100 = £3 (or £3 per £100 of par) Running yield = £3 / 95 = 3.16%
If the price is 105:
Running yield = £3 / 105 = 2.86%
The relationship is inverse, just as in U.S. bonds: a lower price means a higher running yield. But the terminology is different. A U.S. investor calls this "current yield"; a UK investor calls it "running yield." The concept is identical.
Redemption yield explained
Redemption yield is the UK term for yield to maturity. It is the internal rate of return of all the bond's cash flows—the annual coupons and the par value at maturity—if you buy at the current price and hold to maturity.
Redemption yield = The discount rate that equates the present value of all cash flows to the current price
The calculation is the same as YTM in the U.S., but there is a twist: UK bonds typically pay coupons once per year, not semi-annually. So the redemption yield calculation reflects annual compounding, not semi-annual.
For the gilt above (3% coupon, price 95, years to maturity 5):
You receive:
- £3 at the end of year 1
- £3 at the end of year 2
- £3 at the end of year 3
- £3 at the end of year 4
- £3 + £100 at the end of year 5
The redemption yield is the discount rate r that satisfies:
95 = 3 / (1+r) + 3 / (1+r)^2 + 3 / (1+r)^3 + 3 / (1+r)^4 + 103 / (1+r)^5
Solving for r yields approximately 3.50%.
This is conceptually identical to U.S. YTM, except the coupon frequency is annual, not semi-annual.
The difference from U.S. terminology
A U.S. investor would say:
- Current yield: 3.16%
- Yield to maturity: 3.50%
A UK investor says:
- Running yield: 3.16%
- Redemption yield: 3.50%
Same numbers, different words. But there is a subtle difference: UK redemption yield assumes annual coupons, so it is calculated and quoted on an annual compounding basis. U.S. YTM assumes semi-annual coupons (the U.S. standard), so it is calculated on a semi-annual basis. When comparing a UK gilt redemption yield to a U.S. Treasury YTM, you must convert one to the other's basis (using bond equivalent yield formulas).
Why the different terminology?
The UK bond market developed independently from the U.S. market. Gilts (UK government bonds) traditionally paid annual coupons, and the market developed vocabulary to match. Over time, convention solidified. A "running yield" was a term for income yield (how much you get paid each year relative to the price); "redemption yield" was the term for total return if you held to redemption (maturity).
Australia, Canada, New Zealand, and other Commonwealth countries follow the UK convention. Gilts, bonds, and loans are quoted as running yield and redemption yield. You must be familiar with both terms to invest internationally.
Accrued interest on Commonwealth bonds
Like U.S. bonds, Commonwealth bonds trade with accrued interest in the secondary market. You pay the quoted price plus accrued interest, calculated as a fraction of the next coupon.
For a gilt paying £3 annual coupon on June 15, if you buy on September 15 (three months into the coupon period), you pay accrued interest of £0.75 (three months of £3 annual coupon).
The running yield is quoted on the clean price (excluding accrued interest), just as in the U.S.
Running yield vs redemption yield relationships
Like U.S. current yield and YTM:
- When a bond is trading at par, running yield equals redemption yield (both equal the coupon rate).
- When a bond is trading at a discount (below par), running yield is lower than redemption yield. You get a capital gain at maturity.
- When a bond is trading at a premium (above par), running yield is higher than redemption yield. You get a capital loss at maturity.
This might seem backwards: you might expect running yield (income only) to be lower than redemption yield (total return). The key is that redemption yield includes the capital gain embedded in a discount bond. A bond at 95 trading with a 3% coupon has a low running yield (3.16%) but a higher redemption yield (3.50%) because of the £5 gain at maturity.
Comparing Commonwealth and U.S. bonds
If you want to compare a UK gilt redemption yield to a U.S. Treasury YTM, you must account for the coupon frequency difference.
A UK gilt with a 2% coupon, price 98, 10-year maturity might have:
- Running yield: 2.04%
- Redemption yield: 2.18% (approximate, annual compounding)
A U.S. Treasury with the same coupon, price, and maturity might have a YTM of 2.15% (semi-annual compounding).
The yields are close but not identical. To compare fairly, you would convert the gilt's redemption yield (annual) to semi-annual compounding (the U.S. standard):
Semi-annual equivalent = 2 × [(1 + 0.0218 / 2)^0.5 − 1]
This becomes technical, and most investors use calculators or trading systems that handle the conversion automatically. The key takeaway is that you cannot directly compare a UK redemption yield to a U.S. YTM; you need to account for the compounding frequency.
Commonwealth bond markets
Major Commonwealth bond markets:
- UK gilts — government debt, the most liquid bond market outside the U.S. Gilts are quoted as running yield and redemption yield.
- Australian Government Bonds — issued by the Australian government. Quoted as running yield and redemption yield, with semi-annual coupons (different from UK annual coupons).
- Canadian Government Bonds — issued by the Canadian government. Quoted as YTM (semi-annual), similar to the U.S. convention.
- New Zealand Government Bonds — issued by the NZ government. Quoted as running yield and redemption yield.
- Bonds issued by Commonwealth corporations — follow the local market convention (gilts issued in the UK use running yield / redemption yield; bonds issued in Australia use the same terminology but semi-annual coupons).
When investing internationally, check the local convention. Australian bonds confusingly use "running yield" and "redemption yield" but with semi-annual coupons, making them closer to U.S. bonds than UK gilts are.
Historical context: gilt market conventions
The UK gilt market has been trading for centuries, and its conventions are deeply rooted. Even as markets globalized and electronic trading made conversions easier, the running yield / redemption yield terminology persisted. Gilts are often the entry point for international bond investing, so understanding these terms is important.
In the 2010s, when UK interest rates fell to near zero, gilt redemption yields fell accordingly. A 10-year gilt that yielded 2% in 2010 might have yielded 0.5% in 2020. The terminology did not change; only the numbers fell.
Inflation-linked bonds in Commonwealth markets
The UK, Australia, and Canada all issue inflation-linked government bonds. In the UK, these are called Index-linked gilts. They pay a coupon that is adjusted by inflation (measured by the Retail Price Index or Consumer Price Index) and the redemption yield is quoted as a real yield (yield after inflation).
A 10-year index-linked gilt with a real redemption yield of 0.5% might have an actual coupon of 2.5% if inflation is running at 2%, but the real yield (the purchasing power gain) is 0.5%.
This is a specialized concept, but it matters for international bond investors seeking inflation protection.
Practical guidance for investors
If you are investing in Commonwealth bonds:
- Learn the terminology — Running yield = current yield; Redemption yield = YTM. The concepts are the same, the words are different.
- Check coupon frequency — UK gilts pay annual coupons; Australian bonds pay semi-annual. This affects the yield calculation and comparison.
- Account for currency — Most Commonwealth bonds are issued in the local currency (GBP for UK gilts, AUD for Australian bonds). Currency risk is an additional factor beyond interest rate risk.
- Use qualified advisors — International bond investing introduces complexity. Consider working with advisors familiar with the local markets.
- Compare on a consistent basis — Use BEY or another standardized method to compare Commonwealth bonds to U.S. bonds or to each other.
Conclusion: terminology differs, concepts are universal
Running yield and redemption yield are Commonwealth terms for the U.S. concepts of current yield and YTM. The underlying ideas—that a bond's income is separate from its capital gain or loss, and that total return is the sum of both—are universal. But the terminology and conventions vary by market. Understanding both systems is essential for global bond investing.
Process
Related concepts
Next
We have now covered the main yield measures used in U.S. and international markets. But all these yields assume the bond is held in isolation. In practice, a bond's price is often above or below par, and the price relative to par tells you whether the bond is attractive or expensive. That brings us to discount and premium bonds.