Current yield definition
/What is Current Yield?
Current yield is the rate of return on a bond investment. This is the return on investment that the buyer of a bond can expect to experience by acquiring the security now and holding it for the next year. it is focused on the current market price of a bond, rather than its face value.
How to Calculate Current Yield
Current yield is presented as a percentage, and is calculated as the annual coupon payment made by the bond issuer, divided by the current price of the bond. For example, ABC Corporation has issued a bond with a $1,000 face value and an $80 annual coupon payment. This results in an 8% annual coupon rate. The current market price of the bond is $985, so the current yield is calculated as follows:
$80 Annual coupon payment ÷ $985 Current market price = 8.12% Annual coupon rate
In those rare cases where a bond is trading at its face value, the current yield is the same as the coupon rate. When the bond is trading lower than its face value, the current yield is higher than the coupon rate. When the bond is trading higher than its face value, the current yield is lower than the coupon rate.
Problems with Current Yield
A flaw in this calculation is that the investor's total return will also depend on the price at which the investor can sell the bond one year in the future. The market price will probably have changed, so the investor could experience a gain or loss on the sale, which impacts the total return on the investment.