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Gross and Net Yeild

N

Noely

Member
Hi All,

Sorry for yet another post, but I was wondering if someone could add to my understanding (below) of the gross and net yield concepts.

Net Yield - Takes into account factors such as capital gains tax being applied to the yield amount being obtained.

Calculated as:

(Dividend / Redemption)*(1-capital gains tax%)

Gross Yield - Does not take into account things such as capital gains tax.

(Dividend / Redemption)
 
Generally speaking, the gross yield ignores tax, the net yield allows for tax.

Tax might be payable on coupons (income tax) or capital gains (CG tax). You allow for whatever the investor in the question has to pay tax on, or ignore it all.

The calculation would depend on the type of yield you're asked to calculate. Eg

Running yield = (net or gross) coupon /price.
Redemption yield is the yield that solves your equation of value for the bond.

The equation you quote below is similar to that used in the Capital Gains Test: (Coupon/Redemption) x (1- income tax rate), when comparing against the net yield (allowing for tax).
 
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