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Current Yield Definition, Formula, and How to Calculate It

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Updated October 30, 2020

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What Is the Current Yield?

Current yield is an investment's annual income (interest or dividends) divided by the 澳洲幸运5官方开奖结果体彩网:current price of the security. This measure examines the current price of a bond, rather than looking at its 澳洲幸运5官方开奖结果体彩网:face value. Current yield represents the return an investor would expect to earn, if the owner purchased the bond and held it for a year. However, current yield is not the 澳洲幸运5官方开奖结果体彩网:actual return an ♏investor receives if he♋ holds a bond until maturity.

Key Takeaways

In fixed income investing, a bond's current yield is an investment's annual income, including both interest payments and dividends payments, which are then divided by the current price of the security.
Because the market price of a bond may change, investors may purchase bonds at either a discount or a premium, where the purchase price of a bond affects the current yield.
With equities, the current yield can also be calculated by taking the dividends received for a stock and dividing that amount by the stock’s current market price.

Image by Sabrina Jiang © Investopedia 2020

Understanding Current Yield

Current yield is most often applied to bond investments, which are securities that are issued to an investor at a 澳洲幸运5官方开奖结果体彩网:par value (face amount) of $1,000. A bond carries a coupon amount of interest that is stated on the face of the bond certificate, and bonds are traded between investors. Since the market pr💖ice of a bond changes, an investor may purchase a bond at a discount (less than par value) or 🌊a premium (more than par value), and the purchase price of a bond affects the current yield.

How Current Yield Is Calculated

If an investor buys a 6% coupon rate bond for a discount of $900, the invest♉or earns an annual interest income of ($1,000 X 6%), or $60. The current yield is ($60) / ($900), or 6.67%. The $60 in annual interest is fixed, regardless of the price paid for the bond. 💜On the other hand, if an investor purchases a bond at a premium of $1,100, the current yield is ($60) / ($1,100), or 5.45%. The investor paid more for the premium bond that pays the same dollar amount of interest, therefore the current yield is lower.

Current yield can also be 澳洲幸运5官方开奖结果体彩网:calculated for stocks by taking the 澳洲幸运5官方开奖结果体彩网:dividends received for a sto♑ck and dividing the amount by the stock’s curr🌠ent market price.

Important

As a financial theory general rule, investors should expect higher ♋returns, for riskier investments. Therefore, if two bonds 🐠have similar risk profiles, investors should opt for the higher return producing offering.

Factoring in Yield to Maturity

Yield to maturity (YTM) is the total return earned on a bond, assuming that the bond owner holds the bond until the matu🦋rity date. For example, let's assume that the 6% coupon rate bond purchased for a discount of $900, will mature in the 10 years. To calculate YTM, an investor makes an assumption about a discount rate, so that the future principal and interest payments are discounted to present value.

In this example, the investor receives $60 in annual interest payments for 10 years. At maturity, the owner receives the par value of $1,000, and the investor recognizes a $100 capital gain. The present value of the interest payments and the capital gain are added to compute the bond's YTM. If the bond is purchased at a premium, the YTM calculation includes a 澳洲幸运5官方开奖结果体彩网:capital loss when the bond matures at par value.

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