Current Yield
IntermediateCurrent yield is a bond's annual coupon payment divided by its current market price, showing the income return an investor receives at today's price.
Current yield focuses only on income. It answers the question: if I buy this bond today, what percentage of my purchase price will I receive in interest each year?
For example, a bond with a face value of 1,000 and a 5% coupon pays 50 a year. If it trades at 950, its current yield is 50 divided by 950, about 5.26%. If it trades at 1,050, its current yield is about 4.76%.
Current yield is simple to calculate and useful for investors mainly interested in income. It is also used for shares and funds, where it means annual income divided by price.
Its limitation is that it ignores the gain or loss at maturity. A bond bought at 950 will be repaid at 1,000, adding to the investor's return, while a bond bought at 1,050 will lose 50 by maturity. Yield to maturity includes this effect, so it gives a more complete picture of total return. Current yield also ignores the time value of money and the timing of payments.
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