Current yield
Current yield is a bond's annual coupon divided by its market price. It captures only the income component of return, overstating total return for discount bonds and understating it for premium bonds compared with yield-to-maturity.
See it move
A €1,000 face-value bond pays a 5% annual coupon (€50) and trades at €950. Current yield = €50 ÷ €950 ≈ 5.26%. That figure counts only the coupon income; it excludes the €50 capital gain the investor will realise when the bond redeems at €1,000, which yield-to-maturity would include.
The formula
Variables
- current yield (expressed as a decimal or percentage)
- annual coupon payment in currency
- current market price of the bond
Captures only the income component of return. For a discount bond (P < face value) current yield understates total return relative to yield-to-maturity, because the investor will also realise a capital gain at redemption.
Check yourself
A bond has a face value of €1,000, a 6 per cent annual coupon, and currently trades at €920. Which statement about its current yield and its relationship to yield-to-maturity is correct?