Loading the player...

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.

Formula for calculating current yield.

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 stock’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.

  1. Yield To Maturity (YTM)

    Yield to maturity (YTM) is the total return expected on a bond ...
  2. Discount Bond

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

    Running yield is the annual income on an investment divided by ...
  4. Premium Bond

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

    The effective yield is the yield of a bond which has its coupons ...
  6. Bond Equivalent Yield - BEY

    The bond equivalent yield is a calculation for restating semi-annual, ...
Related Articles
  1. Investing

    4 Basic Things to Know About Bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  2. Investing

    Understanding Bond Prices and Yields

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

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  4. 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.
  5. Investing

    Corporate Bonds: Advantages and Disadvantages

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

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  7. 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.
  8. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  1. What does a negative bond yield mean?

    Find out what it means when a bond has a negative yield and what circumstances must arise for the yield to be negative when ... Read Answer >>
  2. What is the difference between yield to maturity and the spot rate?

    Find out how yield to maturity and spot rate calculations use different discount rates to determine the present market value ... Read Answer >>
  3. Will the price of a premium bond be higher or lower than its par value?

    Find out why the selling price of a premium bond is always higher than its par value, including how changing interest rates ... Read Answer >>
  4. What is the difference between yield to maturity and the yield to call?

    Determining various the various yields that callable bonds can provide investors is an important factor in the bond purchasing ... Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center