Current yield
What is current yield?
Current yield measures the income an investment produces in relation to its current market price. For a bond, it equals the bond’s annual coupon payment divided by its current market price. For a dividend-paying stock, it equals the annual dividend divided by the current share price. Current yield reflects the income component of return but does not capture capital gains or losses or reinvestment effects.
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Formula
- Bond current yield = Annual coupon payment ÷ Current market price
- Stock current yield = Annual dividend ÷ Current share price
Note: For a bond, the annual coupon payment = coupon rate × face (par) value.
How it works (brief)
- If a bond’s market price falls below par (discount), the current yield rises because the fixed coupon is spread over a lower purchase price.
- If the bond’s price rises above par (premium), the current yield falls.
- Current yield is a snapshot based on current price and next 12 months’ income; it assumes the investor holds for one year (or is comparing income rates), not necessarily until maturity.
Examples
- A 6% coupon bond with $1,000 par pays $60 annually.
- Bought at $900: current yield = $60 ÷ $900 = 6.67%
- Bought at $1,100: current yield = $60 ÷ $1,100 = 5.45%
- A stock paying $2 per year with a market price of $50: current yield = $2 ÷ $50 = 4%
Current yield vs. yield to maturity (YTM)
- Current yield measures only income relative to price.
- Yield to maturity (YTM) estimates the total return if the bond is held to maturity, including:
- All coupon payments (discounted to present value)
- Any capital gain (if bought at discount) or capital loss (if bought at premium)
- Reinvestment assumptions for coupons
YTM is thus a more comprehensive measure of expected total return for a long-term bond investment.
Limitations
- Ignores capital gains/losses realized at sale or maturity.
- Doesn’t account for the time value of money or timing of coupon payments.
- Omits reinvestment rate risk (what coupons can be reinvested at).
- Doesn’t reflect callable features or other bond-specific risks.
- Not a complete measure for comparing bonds with different maturities or cash-flow patterns.
When to use current yield
- Quick comparison of income-generating potential across bonds or dividend stocks.
- Assessing the income portion of return when price is known.
- Not a substitute for YTM or total return analysis when holding to maturity or evaluating long-term outcomes.
Key takeaways
- Current yield = annual income ÷ current market price.
- It shows the income return at today’s price but ignores capital gain/loss and time value.
- Use current yield for a quick income comparison; use YTM or total return calculations for comprehensive return estimates.