Current yield
What is Current yield?
Current yield is a bond's annual coupon income divided by its current market price.
Why current yield is used
Current yield provides a quick view of annual coupon income relative to the price paid today. It is more informative than coupon rate when a bond trades away from face value, but it is not a complete return measure. It excludes price movement toward par, reinvestment, default, calls, taxes, costs, and changes before sale or maturity.
How it is calculated
Divide the annual contractual coupon amount by the bond's market price. A 5% coupon on $1,000 face value pays $50 annually. At a price of $900, current yield is 5.56%; at $1,100 it is 4.55%. Use the actual annualized coupon amount and a price convention that is clearly disclosed.
Current yield versus YTM
Yield to maturity incorporates all promised cash flows, their timing, and the difference between market price and principal repayment. Current yield considers only coupon income for a year. For a discount bond, current yield is commonly below YTM, while for a premium bond it is commonly above YTM, assuming otherwise standard cash flows and repayment at par.
How to interpret it
Use current yield to discuss immediate income, not expected total return. A high figure may reflect a depressed price caused by credit or liquidity concerns. For floating-rate bonds, the next annual coupon must be estimated and can change. For zero-coupon bonds, current yield is zero even though the investor may earn a positive return through accretion.
Limitations
The metric ignores maturity, duration, credit loss, call risk, and capital gain or loss. It can make a short bond and a very long bond appear comparable despite different risks. Quoted annual income may not match cash received over the investor's actual holding period. Tax rules can also distinguish interest from discount accretion or capital gain.
Practical checklist
Verify coupon amount, payment schedule, market price, accrued interest convention, and whether the rate floats. Present coupon rate, current yield, YTM, yield to call or worst, maturity, duration, and credit quality together. Do not rank bonds solely by current yield. Explain clearly that it is an income snapshot rather than a forecast of annual total return.
Also known as: income yield