The current yield, interest yield, income yield, flat yield, market yield, mark to market yield or running yield is a financial term used in reference to bonds and other fixed-interest securities such as gilts. It is the ratio of the annual interest payment and the bond's current clean 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.
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 coupon-bearing bond sells at;
- a discount: YTM > current yield > coupon yield
- a premium: coupon yield > current yield > YTM
- par: YTM = current yield = coupon yield.
For zero-coupon bonds selling at a discount, the coupon yield and current yield are zero, and the YTM is positive.
Example Calculation
To calculate the current yield of a bond with a face value of $100 and a coupon rate of 5.00% that is selling at $95.00 (clean; not including accrued interest), use:
See also
- Adjusted current yield
References
- Current Yield at investopedia.com