Bond current yield:
formula and worked example

What current yield says about a bond you buy today

A bond pays a fixed coupon, but you rarely buy it at face value. Its market price moves with interest rates and credit perceptions, so the coupon that looks like 6.5% on the original paper can represent a very different income on the money you actually spend. Current yield answers one narrow question: how much annual coupon income do I receive for each unit of price I pay today?

It is a snapshot of income, which makes it popular with investors who want cash flow, such as retirees comparing several bonds or a bond against a deposit. It is quick to compute and needs only two numbers from any quote screen.

Because the coupon is contractual, the figure is also a quick way to see how the market is pricing the bond. A bond whose current yield has moved well above its coupon rate is trading at a discount, which often means rates have risen or investors want more compensation for risk.

What it leaves out is just as important: any gain or loss when the bond is repaid at face value, and the time left until that happens.

The formula and what each input is

• Annual coupon: the total interest payable per year on one bond, in currency. A bond paying 32.5 twice a year has an annual coupon of 65.
• Market price: what the bond costs per unit now, in the same currency and for the same unit of face value as the coupon.

The coupon is fixed by the bond's terms at issue, so it does not change when market conditions do. What changes is the price in the denominator, which is why current yield moves opposite to price.

Worked example: a 65 coupon bought at 950

Suppose a bond pays 65 a year in coupons and its price today is 950 per bond. If the bond has a face value of 1,000, the stated coupon rate is 6.5%.

1. 1Take the annual coupon: 65.
2. 2Take the price you pay: 950.
3. 3Divide: 65 ÷ 950 ≈ 0.06842.
4. 4Multiply by 100: about 6.842%.

Buying below face value lifts the figure from the 6.5% coupon rate to 6.842%. Paying 1,050 instead would lower it to about 6.19%, which shows the effect of price directly.

Current yield is not yield to maturity

Return from a bond has two parts: the coupons and the difference between the purchase price and the redemption value. Current yield records only the first. Holding the 950 bond to maturity at a face value of 1,000 would earn an additional 50 as it is repaid, so the true annual return over the life of the bond is higher than 6.842%.

The reverse holds for a premium bond. One bought above face value will be repaid at less than you paid, a built-in loss that current yield ignores. As a result, current yield overstates the return on premium bonds and understates it on discount bonds.

How the yield responds to coupon and price

The table raises the coupon by 10% against an unchanged price. Real bonds keep their coupon, so read this as a comparison between two different bonds, one paying a larger coupon at the same price.

A coupon 10% higher gives a yield 10% higher, from 6.842% to 7.526%, because coupon sits in the numerator. Price matters in the opposite direction and more commonly changes: at a price of 900 the same 65 coupon yields about 7.222%, and at a price of 1,000 it yields exactly 6.5%.

Common ways to misread it

• Using the clean price when you will pay accrued interest. The price you actually hand over can include interest earned since the last coupon date.
• Confusing coupon rate with yield. The coupon rate is fixed on face value; the yield is what you earn on the price you paid.
• Ignoring maturity. A short bond bought at a discount and a long one at the same price have very different total returns despite equal current yields.
• Overlooking credit risk. A high yield can reflect a higher chance of missed payments, not a bargain.

Position in the term also matters. A bond with one year left will be pulled towards face value quickly, so its price today says much about the coming redemption, whereas one with fifteen years left will carry its current yield for a long time. The same number therefore means different things at different ends of the maturity range.

A short routine for comparing bonds

1. 1Note each bond's annual coupon and current market price.
2. 2Calculate current yield for each as a first screen of income.
3. 3Look up the remaining term and compare yield to maturity.
4. 4Consider credit quality and how rate changes would move the price.
5. 5Choose based on whether you want income now or total return over the holding period.

Current yield works well as step two, but stopping there would let a cheap-looking income number hide a loss at maturity.