Current yield


Current yield

The current yield, interest yield, income yield, flat yield or running yield is a financial term used in reference to bonds and other fixed-interest securities such as gilts. It is the ratio of the annual interest payment and the bond's current clean price:


\text{Current yield} = \frac{\text{Annual interest payment} }{\text{Clean price} }.

The current yield only therefore refers to the yield of the bond at the current moment. It does not reflect the total return over the life of the bond. In particular, it takes no account of reinvestment risk (the uncertainty about the rate at which future cashflows can be reinvested) or the fact that bonds usually mature at par value, which can be an important component of a bond's return.

Contents

Relationship between yield to maturity and coupon rate

The concept of current yield is closely related to other bond concepts, including yield to maturity, and coupon yield. When a bond sells at;

  • a discount: YTM > current yield > coupon yield
  • a premium: coupon yield > current yield > YTM
  • par: YTM = current yield = coupon yield.

Current Yield = Total Yield - Capital Gains Yield

The current yield is the annual payment divided by the price. Algebraically expressed as Y = R/P, where Y is yield, R is the annual payment, and P represents price. This creation shows the fine line between high and low returns over more than one period. A high yield will produce a relative payment and a low yield will do the same. When the yields of several periods are compared a higher yield will show a higher payment with less risk associated. This equates to investors expecting a higher yield over a length of investing. The possibility of market risks are ignored.

Example Calculation

To calculate the current yield of a bond with a face value of $100 and a coupon rate of 5.00% that is selling at $95.00 (clean, not including accrued interest), use:

\text{Current Yield} = \frac{F \times r}{P} = \frac{$100 \times 5.00%}{$95.00} = \frac{$5.00}{$95.00} = 5.2631%

See also

  • Adjusted current yield

References


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Look at other dictionaries:

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