Current Yield

Current yield is a financial metric that measures the annual income (interest or dividends) of an investment, expressed as a percentage of its current market price. It is commonly used to assess the profitability of fixed-income securities such as bonds.

Definition of Current Yield

Current yield is calculated by taking the annual coupon payment of a bond and dividing it by the bond’s current market price. This yield helps investors understand the income they can expect relative to the price they would pay for the investment.

Calculation of Current Yield

To calculate the current yield, use the following formula:

Current Yield = (Annual Coupon Payment / Current Market Price) x 100

Components of Calculation

• Annual Coupon Payment: The total interest payment received by the bondholder in one year. This can be found by multiplying the bond’s coupon rate by its face value.
• Current Market Price: The price at which the bond is currently trading in the market. This can fluctuate based on market conditions, interest rates, and other economic factors.

Example of Current Yield

Consider a bond with a face value of $1,000 that pays an annual coupon rate of 5%. The annual coupon payment would thus be:

Annual Coupon Payment = 5% of $1,000 = $50

If the bond’s current market price is $900, the current yield can be calculated as follows:

Current Yield = ($50 / $900) x 100 = 5.56%

This means that based on the current market price, the investor can expect a yield of 5.56% from the bond.

Current yield offers a straightforward way for investors to gauge their potential earnings from fixed-income investments and can help in comparing different securities.