Current Yield

What Is Current Yield?

Current yield is a bond's annual coupon income divided by its current market price. It is a quick way to estimate the income a bond is producing relative to what an investor would pay for it now. In fixed income, a bond can trade above or below face value, so the coupon rate alone does not tell you what the bond's income yield looks like at today's price.

Key Takeaways

• Current yield compares annual coupon income with the bond's current market price.
• It is an income measure, not a full return measure.
• Current yield does not capture the gain or loss that may result if a bond is bought at a discount or premium and held to maturity.
• Because of that, it is narrower than yield to maturity.
• It is useful for comparing cash income across bonds, but not as a complete return forecast.

How Current Yield Works

To estimate current yield, an investor looks at the bond's annual coupon payments and divides that amount by the bond's current price. If the bond's price falls while the coupon remains the same, the current yield rises. If the price rises, the current yield falls. Current yield therefore changes even when the bond's coupon rate does not.

This makes current yield useful for a quick income comparison, but it does not tell the whole return story.

Current Yield Versus Yield to Maturity

Yield to Maturity includes both coupon income and the effect of buying the bond above or below par and holding it until maturity. Current yield ignores that price pull-to-par effect. So while current yield helps answer, "What income am I getting at today's price?" YTM helps answer, "What annualized return might I earn if I hold this bond to maturity?"

How Current Yield Estimates Bond Income Today

Many income-oriented investors care first about cash flow, and current yield offers a fast way to compare one bond's income output with another bond's income output at current market prices. But it can be misleading if investors mistake it for a complete return estimate.

Example Coupon Income Relative to Price

Suppose a bond pays $80 of annual coupon income and trades for $1,000. Its current yield is 8 percent. If that same bond's market price rises, the current yield falls because the investor is paying more to get the same coupon income. The reverse is true if the price falls.

The Bottom Line

Current yield is a bond's annual coupon income divided by its current market price. It gives a quick view of income relative to price, but it should not be confused with a full return measure like yield to maturity.