Current yield

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Current yield is a financial term used in reference to bonds. It is the ratio of the annual interest payment and the bond's current price.

The current yield only therefore refers to the yield of the bond at the current moment. It does not reflect the total return over the life of the bond. In particular, it takes no account of reinvestment risk (the uncertainty about the rate at which future cashflows can be reinvested) or the fact that bonds usually mature at par value, which can be an important component of a bond's return.

Formal definition

Current = (BondCFs(thisyear)) / (Bond − price)

Relationship between yield to maturity and coupon rate.

The concept of current yield is closely related to other bond concepts, including yield to maturity, and coupon yield. When a bond sells at;

- discount: YTM > current yield > coupon yield

- a premium: coupon yield > current yield > YTM

- par: YTM = current yield = coupon yield.

The current yield is the annual payment divided by the price. Algebraically expressed as Y = R/P, where Y is yield, R is the annual payment, and P represents price. This creation shows the fine line between high and low returns over more than one period. A high yield will produce a relative payment and a low yield will do the same. When the yields of several periods are compared a higher yield will show a higher payment with less risk associated. This equates to investors expecting a higher yield over a length of investing. The possibility of market risks are ingored.