## What is the 'Current Yield'

Current yield is an investment's annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value. Current yield represents the return an investor would expect if the owner purchased the bond and held it for a year, but current yield is not the actual return an investor receives if he holds a bond until maturity.

Next Up

## BREAKING DOWN 'Current Yield'

Current yield is most often applied to bond investments, which are securities that are issued to an investor at a par value (face amount) of \$1,000. A bond carries a coupon amount of interest that is stated on the face of the bond certificate, and bonds are traded between investors. Since the market price of a bond changes, an investor may purchase a bond at a discount (less than par value) or a premium (more than par value), and the purchase price of a bond affects the current yield.

## How Current Yield Is Calculated

If an investor buys a 6% coupon rate bond for a discount of \$900, the investor earns annual interest income of (\$1,000 X 6%), or \$60. The current yield is (\$60) / (\$900), or 6.67%. The \$60 in annual interest is fixed, regardless of the price paid for the bond. If, on the other hand, an investor purchases a bond at a premium of \$1,100, the current yield is (\$60) / (\$1,100), or 5.45%. The investor paid more for the premium bond that pays the same dollar amount of interest, so the current yield is lower.

Current yield can also be calculated for stocks by taking the dividends received for a stock and dividing the amount by the stockâ€™s current market price.

## Factoring in Yield to Maturity

Yield to maturity (YTM) is the total return earned on a bond, assuming that the bond owner holds the bond until the maturity date. Assume, for example, that the 6% coupon rate bond purchased for a discount of \$900 matures in the 10 years. To calculate YTM, an investor needs to make an assumption about a discount rate, so that the future principal and interest payments are discounted to present value.

In this example, the investor receives \$60 in annual interest payments for 10 years. At maturity in 10 years, the owner receives the par value of \$1,000, and the investor recognizes a \$100 capital gain. The present value of the interest payments and the capital gain are added to compute the bond's YTM. If the bond is purchased at a premium, the YTM calculation includes a capital loss when the bond matures at par value.

RELATED TERMS
1. ### Discount Bond

A discount bond is a bond that is issued for less than its par ...
2. ### Running Yield

Running yield is the annual income on an investment divided by ...
3. ### Bond Discount

Bond discount is the amount by which the market price of a bond ...

A premium bond is a bond that is trading above its par value. ...
5. ### Yield Basis

The yield basis is a method of quoting the price of a fixed-income ...
6. ### Effective Yield

The effective yield is the yield of a bond which has its coupons ...
Related Articles
1. Investing

### Simple Math for Fixed-Coupon Corporate Bonds

A guide to help to understand the simple math behind fixed-coupon corporate bonds.
2. Investing

### Understanding Bond Prices and Yields

Understanding this relationship can help an investor in any market.
3. Investing

### How To Evaluate Bond Performance

Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
4. Investing

Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
5. Investing

### How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
6. Investing

### Find The Right Bond At The Right Time

Find out which bonds you should be investing in and when you should be buying them.
7. Investing

### Corporate Bond Basics: Learn to Invest

Understand the basics of corporate bonds to increase your chances of positive returns.
RELATED FAQS
1. ### Current yield vs yield to maturity

Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ... Read Answer >>
2. ### Can a bond have a negative yield?

It is unlikely that a bond will have a negative yield but there are a few rare exceptions. Learn of the cases in which a ... Read Answer >>
3. ### When is a bond's coupon rate and yield to maturity the same?

Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
Hot Definitions
1. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
2. ### Compound Annual Growth Rate - CAGR

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
3. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
4. ### Price-Earnings Ratio - P/E Ratio

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
5. ### Internal Rate of Return - IRR

Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
6. ### Limit Order

An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.