What is current yield (brief definition)
– Current yield measures the income return an investor would receive from a security over the next year, expressed as a percentage of the security’s current market price. For bonds it is the annual coupon payment divided by the bond’s current price. For stocks it is the most recent annual dividend divided by the current share price.
Key formulas
– Current yield (bonds) = Annual coupon payment / Current market price
– Dividend yield (stocks) = Annual dividends per share / Current market price
– Approximate yield to maturity (YTM) — a quick estimate, not exact:
Approx YTM ≈ (Annual interest + (Face value − Price)/Years to maturity) / ((Face value + Price)/2)
Definitions of common terms
– Coupon rate: the annual interest rate stated on a bond, applied to its face (par) value.
– Face value (par): the amount the issuer will pay at maturity (commonly $1,000 for many corporate bonds).
– Current market price: what investors would pay today for the bond or share.
– Yield to maturity (YTM): the total annualized return expected if the bond is held to maturity and coupon payments are reinvested at the YTM rate.
Worked numeric examples
1) Current yield on a bond
– Bond face value = $1,000; coupon rate = 6% → annual coupon = $1,000 × 6% = $60.
– If you buy the bond for $900: Current yield = $60 / $900 = 0.0667 = 6.67%.
– If you buy the same bond for $1,100: Current yield = $60 / $1,100 = 0.0545 = 5.45%.
Explanation: the dollar coupon is fixed; paying less raises the percentage income, paying more reduces it.
2) Approximate YTM for the discount purchase (10-year remaining maturity)
– Annual interest = $60. Capital gain at maturity = $1,000 − $900 = $100 over 10 years → $10 per year (on average).
– Numerator = 60 + 10 = 70. Denominator = (1,000 + 900)/2 = 950.
– Approx YTM ≈ 70 / 950 ≈ 0.0737 = 7.37% per year.
Note: the exact YTM requires solving the present-value equation for the discount rate that equates the price to the discounted cash flows; the approximation above is a convenient estimator.
What current yield tells you (and what it does not)
– It tells you the next year’s income return relative to what you’d pay today.
– It is simple and quick to compute; useful for quick comparisons of income rates across similar securities.
– Limitations:
– Ignores capital gains or losses that will occur if the bond is redeemed at par (so it omits principal appreciation/depreciation).
– Ignores the time value of money beyond one year and the timing of coupon payments.
– Does not account for credit/default risk or changing interest rates.
– For bonds, it is not the same as YTM (which accounts for all remaining payments and principal repayment).
– For stocks, dividend yield ignores growth prospects and dividend sustainability.
Checklist: when to use current yield
– Use current yield when you need a quick measure of the income component of return.
– Confirm the security type (bond or dividend-paying stock) and that you know the correct annual coupon/dividend amount.
– Check the market price you’re using — make sure it’s current.
– If you care about total return to maturity, use (or calculate) YTM instead of current yield.
– Consider credit risk, interest-rate risk, and whether coupon payments can or will be reinvested.
Practical steps to compute current yield
1. Find the annual coupon payment (bond) or the annualized dividends (stock).
2. Find the current market price (what you can buy the security for today).
3. Divide the annual income by the current price and multiply by 100 to express as a percentage.
4. If you need a fuller return measure for a bond, calculate or estimate YTM.
Sources for further reading
– Investopedia — Current Yield: https://www.investopedia.com/terms/c/currentyield.asp
– U.S. Securities and Exchange Commission (Investor.gov) — Bonds: https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds
– FINRA — Learn About Bonds: https://www.finra.org/investors/learn-to-invest/types-investments/bonds
– TreasuryDirect — Help on Bonds and Yields: https://www.treasurydirect.gov/indiv/research/indepth/bonds/res_bonds_buy.htm
Educational disclaimer
This explainer is for educational purposes only. It does not constitute personalized investment advice, and it does not predict future prices or returns. Consult qualified financial professionals before making investment decisions.