Bond Current Yield Calculator

What is Current Yield

Current yield is a financial metric that measures the annual income (interest or dividends) generated by an investment relative to its current market price. It's expressed as a percentage and provides insight into the return you can expect to receive based on the price you paid for the investment.

For bonds, the current yield can be arrived at by simply dividing the annual coupon payment by current bond price.

Example of Bond Current Yield

Let's say you buy a bond with a face value of $1,000, a 5% coupon rate, and the bond is currently trading at $950.

• Annual Income: $1,000 (face value) x 0.05 (coupon rate) = $50
• Current Yield: ($50 / $950) x 100 = 5.26%

Key Points about Current Yield

• Not Total Return: Current yield only considers the income generated and doesn't account for potential capital gains or losses from changes in the bond's price.
• Snapshot in Time: Current yield is a point-in-time calculation based on the current market price. It can change as the bond's price fluctuates.
• Useful for Income-Focused Investors: Current yield is a helpful metric for investors who prioritize generating regular income from their investments.

Difference between Current Yield and Yield to Maturity (YTM)

YTM is a more comprehensive measure of return that takes into account the bond's current price, coupon payments, time to maturity, and the assumption that coupon payments are reinvested at the YTM rate. Think of it like an interest rate for your entire bond investment.

The key differences between current yield and YTM are:

• Timeframe: Current yield focuses on the annual interest income earned in the current year, while YTM considers the total return over the life of the bond
• Cash Flows: Current yield only accounts for the annual coupon payment, whereas YTM includes all future cash flows, including the return of principal at maturity
• Reinvestment: YTM assumes that coupon payments can be reinvested at the same yield, which may not be possible in practice due to changing interest rates

In summary, current yield provides a snapshot of a bond's annual income based on its current price, while YTM offers a more complete picture of a bond's total return over its lifetime, including the return of principal and the assumption of reinvestment at the same yield.