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Current Yield Formula:
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Current yield is a financial ratio that measures the annual income return on a bond investment relative to its current market price. It represents the percentage of income earned from a bond based on its current market value rather than its face value.
The calculator uses the current yield formula:
Where:
Explanation: The formula calculates the percentage return an investor would receive if they purchased the bond at its current market price and held it for one year.
Details: Current yield helps investors compare the income-generating potential of different bonds and assess whether a bond is trading at a premium or discount relative to its coupon rate. It's particularly useful for income-focused investors who prioritize regular cash flow from their investments.
Tips: Enter the annual coupon payment in dollars and the current market price of the bond in dollars. Both values must be positive numbers. The result will be displayed as a percentage.
Q1: How is current yield different from yield to maturity?
A: Current yield only considers the annual coupon income relative to the current price, while yield to maturity accounts for both coupon payments and any capital gain or loss if the bond is held to maturity.
Q2: What is a good current yield for bonds?
A: This depends on market conditions, the bond's credit rating, and maturity. Generally, higher-yielding bonds carry more risk. Compare yields to similar bonds in the market.
Q3: Does current yield change over time?
A: Yes, as the market price of a bond fluctuates, its current yield changes inversely. When bond prices rise, current yields fall, and vice versa.
Q4: Why might a bond's current yield differ from its coupon rate?
A: When a bond trades at a price different from its face value, the current yield will differ from the coupon rate. A discount bond will have a higher current yield than its coupon rate, while a premium bond will have a lower current yield.
Q5: Are there limitations to using current yield?
A: Yes, current yield doesn't account for the time value of money, reinvestment risk, or potential capital gains/losses if the bond is sold before maturity. It's best used alongside other yield measures for a complete analysis.