Realised Yield
Also written Realized Yield
The annualised, compounding return earned on a bond sold before maturity, factoring in coupons, the interest earned reinvesting them, and the sale price — sharper than holding period return.
In plain language
Holding period return tells an investor the total return earned on a bond, but it does not compound and cannot be compared across different holding periods. Realised yield fixes exactly that.
It is the annualised rate that makes an investor's total proceeds — coupons, the interest earned reinvesting them, and the sale price — consistent with compounding at that same rate every year.
How it works
The workbook's own case: an investor invests Rs 1,000 in a bond with a 10-year original maturity and a 12% annual coupon. The investor holds it for 5 years, reinvesting each coupon at 14%, and sells it for Rs 1,050 at the end of year 5.
The accumulated value of the reinvested coupons after 5 years works out to roughly Rs 793, which added to the Rs 1,050 sale proceeds gives about Rs 1,843 in total future value on the original Rs 1,000. Solving for the annualised rate that turns Rs 1,000 into Rs 1,843 over 5 years gives the workbook's own answer: a realised yield of 13%.
The formula
(1 + Realised Yield)^(holding period) =
[Accumulated value of reinvested coupons + Sale proceeds] ÷ Purchase price
A worked example
Using the workbook's own figures: Rs 1,000 invested, a 12% coupon (Rs 120 a year) reinvested annually at 14% for 5 years, and a sale price of Rs 1,050.
Accumulated coupon value = 120 × [(1.14^5 − 1) ÷ 0.14] ≈ Rs 793
Total future value = 793 + 1,050 = Rs 1,843
(1 + r)^5 = 1,843 ÷ 1,000 = 1.843
r ≈ 13%
Compare this with simply adding the coupons and the capital gain without compounding — the crude holding period return approach — which would give a different, non-annualised figure entirely.
Why NISM asks about it
Chapter 3.2.10 (Realised Yield) follows directly after Yield to Maturity, using this exact worked example. Expect a question reproducing this calculation with different numbers, or one testing when realised yield applies instead of YTM.
Common exam traps
- Realised yield only applies when a bond is sold before maturity. Held to maturity, yield to maturity is the right measure instead.
- Realised yield compounds; holding period return does not. Confusing the two, or using HPR's crude percentage as if it were annualised, is the most common error in this section.
Check yourself
1.Which two assumptions underlie the Yield to Maturity calculation?
- a)The bond is sold before maturity and coupons are spent
- b)The investor holds the bond till maturity, and coupons are reinvested at the same rate throughout the tenor
- c)Interest rates rise steadily over the tenor
- d)The bond is a zero-coupon bond
Show the answer
Answer: (b) The investor holds the bond till maturity, and coupons are reinvested at the same rate throughout the tenor
YTM, though better than current yield, and also widely used, has its own shortcomings. First, it assumes that the investor will hold the bond till maturity, which may or may not be the case. Second, it assumes that the coupons received periodically are reinvested for the remaining tenor of the bond at the same rate throughout the tenor.
And the workbook draws out what the second assumption implies: this assumption implies that interest rates would remain same for the entire tenor and that the rates would also be same across tenors, which means the yield curve would be static and flat. This assumption takes YTM away from being practical.
A flat, unchanging yield curve is not something anyone observes — which is why YTM is a convention rather than a prediction.
What YTM actually is: this method takes into consideration all future cash flows coming from the bond (coupons, reinvestment income on the coupons, and the redemption value) and equates the present values of these cash flows to the prevailing market price. YTM can also be understood as the Internal Rate of Return of a bond investment.
Why it survives anyway: YTM has its own advantages, biggest of which being that it is simple and quick computation and hence it is widely used.
If the assumptions do not hold, the alternative is Realised Yield — needed if an investor holds the bond for a period less than the remaining years to maturity and sells it either for a gain or loss.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Current yieldA bond's annual coupon in rupees divided by its current market price — the cash income the bond throws off this year, ignoring any gain or loss at redemption.
- Holding period returnThe total of coupons, income earned on reinvesting them and any capital gain, expressed as a percentage of the purchase price — a crude return for the period actually held, with no compounding in it.
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.