Current yield is a measure of rate of return on a bond. It is calculated as a bond's annual coupon divided by its current price.
Together with coupon rate and yield to maturity it is an important but simple measure of return on a bond.
Company Z's 20-year $1,000 par bonds have a price of $970 and annual coupon rate of 9%. Find its current yield.
Annual coupon is $90 ($1,000 × 9%). Current market price is $970 so current yield is $90/$970 which equals 9.28%.
Relationship between coupon rate, current yield and yield to maturity
There is an interesting relationship between the three measures of bond return namely yield to maturity, coupon rate and current yield.
- If the bond is trading at par current yield equals coupon rate which in turn equals yield to maturity.
- If the bond is trading below par (trading at discount) yield to maturity is higher than current yield which is in turn higher than the coupon rate.
- If the bond is trading above part (trading at premium) coupon rate is higher than current yield which is in turn higher than the yield to maturity.