Current Yield Formula & Basics

What is the Current Yield?

The current yield represents the interest rate of a security and is most commonly associated with bonds.  The current yield is calculated by dividing the annual interest payment by the current bond price.  By comparing the difference of the annual interest and current price of the bond, it gives a measurement of what the investor can expect to make in a years time.  Below is the current yield formula:

Current Yield = Annual Bond Coupon/Current Bond Price

For example, if a bond is priced at $110.45 and the coupon rate is $7.83, the current yield would equal 7.08%. 

How does the Current Yield affect an Investor?

A trader will closely monitor the current yield when looking to exit the position within one year.  In the above formula example if the trader were to purchase the bond, they would receive $7.83 for the investment.  While the investor has received the dividend from the bond, the trader's gain will depend on the price of the bond in a year.  Let's assume the interest rate fell and the price of the bond raised to $114.50 when the investor was ready to close the position.  The actual rate of return for the bond would be 3.6% ($4.05/$110.45). 

Current Yield Basics

• When the bond is selling at a discount, the current yield will be higher than the discount rate
• If the current yield is less than the coupon rate, the bond would be purchased at a premium
• When interest rates rise, bond prices fall
• When interest rates fall, bond prices rise