Securities

Current Yield

Current yield is a bond's annual interest payment divided by its current market price, expressing the income return as a percentage without accounting for capital gains or losses.

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Exam Tip

Current Yield = Annual Interest ÷ Market Price. At discount: Coupon < CY < YTM. At premium: Coupon > CY > YTM.

What is Current Yield?

Current yield measures the annual income return on a bond based on its current market price. Unlike yield to maturity, it only considers interest income and ignores any capital gain or loss at maturity.

Current Yield Formula

Current Yield = (Annual Interest Payment ÷ Current Market Price) × 100

Example Calculation

FactorValue
Par Value$1,000
Coupon Rate6%
Annual Interest$60
Current Price$900 (discount)
Current Yield$60 ÷ $900 = 6.67%

Current Yield at Different Prices

Bond PriceCurrent YieldComparison to Coupon
$1,100 (Premium)$60 ÷ $1,100 = 5.45%Lower than coupon
$1,000 (Par)$60 ÷ $1,000 = 6.00%Equal to coupon
$900 (Discount)$60 ÷ $900 = 6.67%Higher than coupon

Key Relationships

Bond Trading AtCoupon vs. Current Yield vs. YTM
PremiumCoupon > Current Yield > YTM
ParCoupon = Current Yield = YTM
DiscountCoupon < Current Yield < YTM

Current Yield vs. Other Yield Measures

MeasureWhat It Includes
Coupon RateInterest ÷ Par value (fixed)
Current YieldInterest ÷ Market price
Yield to MaturityInterest + Capital gain/loss
Yield to CallInterest + Capital gain/loss to call date

Limitations of Current Yield

LimitationExplanation
Ignores Capital Gain/LossDoesn't account for par vs. purchase price
Ignores Time ValueNo discounting of future cash flows
Incomplete PictureYTM is more comprehensive

When Current Yield is Useful

  • Quick comparison of income from different bonds
  • Focus on income rather than total return
  • Short-term income analysis
  • Comparing bonds with similar maturities

Exam Alert

Current Yield = Annual Interest ÷ Current Price. At premium: CY < Coupon. At discount: CY > Coupon. At par: CY = Coupon. Know the relationship between coupon, current yield, and YTM!

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