Bond
What is a bond's current yield?
Current yield is annual coupon income as a proportion of the bond's market price.
Definition
Current yield is annual coupon income as a proportion of the bond's market price.
Intuition
At a lower price, the same coupon produces a higher current yield, but that does not establish total return.
Formula
Current yield equals annual coupon divided by market price; annual coupon equals face value times coupon rate.
Variables and limitations
Annual coupon equals face value times coupon rate; market price is today's purchase price. The ratio does not discount payments, include maturity gains or losses, or assume coupon reinvestment.
Example
- Enter market price 950, face value 1,000, and coupon rate 5%.
- Annual coupon is 1,000×5% = 50.
- Current yield is 50/950 ≈ 5.26%; any maturity gain or loss is excluded.
Common mistakes
Do not equate coupon rate or current yield with YTM; their denominators and cash flows differ.
Frequently asked questions
Why is current yield different from YTM?
YTM includes all future coupons, principal, and timing; current yield uses only annual coupon divided by current price.
What is a zero-coupon bond's current yield?
Zero, because there is no coupon; a maturity gain can still create a return.
Does it include reinvestment?
No. It also omits taxes, fees, credit risk, and maturity price changes.