Running yield Vs Net running yield

[jatin.agrawal]

hi,

Running yield is defined as ratio of coupon rate to the price of the security
so running yield should be D/P

but i found difficulty in the solution of Q3.25 in Q&A part 3. here they calculated net running yield as

7/91 * 0.06 where D=7, P=91 and net yield(NRY) is 0.06

Is running yield and net running yield different

 

[Mark Mitchell]

The running yield is the coupon rate divided by the price, as you say.

The net running yield is the running yield allowing for tax (as "net" means "after tax is taken off").

The solution given to the question you mention is:

(7/91)*0.6

where 0.6 = 1 - 0.4, and the income tax rate is 40%.

So the extra factor of 0.6 is reducing the running yield for the income tax payable on the dividends. This gives a net running yield.

 

[jatin.agrawal]

thanx a tonne......i was confused with net yield given in the question as it was also 6%..but i didnt notice th figure was multiplied by 0.6 not by 0.06.

thanks and regards
Jatin