Equation and meaning
What is Current Yield?
Current yield is a financial metric that shows the annual income (from interest or dividends) an investment generates relative to its current market price. It is commonly used for bonds and dividend-paying stocks.
How to Calculate Current Yield
The formula for current yield is:
Current Yield = (Annual Coupon Payment / Current Market Price) × 100
For example, if a bond pays an annual coupon of $50 and is currently trading at $1,000, the current yield is:
(50 / 1000) × 100 = 5%
Why It Matters
Current yield helps investors compare the income potential of different investments. However, it does not account for capital gains or losses if the bond is held to maturity.
Key Points to Remember
- Use the current market price, not the face value, in the denominator.
- Annual coupon payment is the total interest paid per year.
- Current yield is expressed as a percentage.
Frequently asked questions
What is current yield?
Current yield is a financial ratio that measures the annual income (interest or dividends) received from an investment relative to its current market price. It is commonly used for bonds.
How do you calculate current yield?
The formula is: Current Yield = (Annual Coupon Payment / Current Market Price) × 100. For example, if a bond pays $50 annually and is priced at $1,000, the current yield is 5%.
What is the difference between current yield and yield to maturity?
Current yield only considers the annual coupon payment relative to the market price, while yield to maturity accounts for all future cash flows, including capital gains or losses if held to maturity.
Related ExamElite resources
Variables in this formula
Annual_cash_coupon_payment — Annual Cash Coupon PaymentBond_price — Bond PriceCurrent_Yield — Current Yield