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.
🎬 Video Explanation
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
| Factor | Value |
|---|---|
| Par Value | $1,000 |
| Coupon Rate | 6% |
| Annual Interest | $60 |
| Current Price | $900 (discount) |
| Current Yield | $60 ÷ $900 = 6.67% |
Current Yield at Different Prices
| Bond Price | Current Yield | Comparison 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 At | Coupon vs. Current Yield vs. YTM |
|---|---|
| Premium | Coupon > Current Yield > YTM |
| Par | Coupon = Current Yield = YTM |
| Discount | Coupon < Current Yield < YTM |
Current Yield vs. Other Yield Measures
| Measure | What It Includes |
|---|---|
| Coupon Rate | Interest ÷ Par value (fixed) |
| Current Yield | Interest ÷ Market price |
| Yield to Maturity | Interest + Capital gain/loss |
| Yield to Call | Interest + Capital gain/loss to call date |
Limitations of Current Yield
| Limitation | Explanation |
|---|---|
| Ignores Capital Gain/Loss | Doesn't account for par vs. purchase price |
| Ignores Time Value | No discounting of future cash flows |
| Incomplete Picture | YTM 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!
Study This Term In
Related Terms
Yield to Maturity (YTM)
Yield to maturity is the total return anticipated on a bond if held until it matures, accounting for all coupon payments, the difference between purchase price and par value, and the time value of money.
Bond
A bond is a fixed-income debt security where the issuer owes the holder a debt and pays interest (coupon) plus principal at maturity.
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