Current Yield

Now that you understand the many ways to measure total portfolio performance, let's look at a simpler but frequently tested metric: current yield. This measures just the income portion of an investment's return.

What Current Yield Measures

• Current yield is the annual income (dividends or interest) divided by the current market price
• Measures income return only; it does not account for capital gains or losses
• Provides a snapshot of what an investor earns in income relative to today's market price

Formulas

For bonds:

For stocks:

Think of it this way: Current yield answers one question: "What percentage of today's market price do I get back each year in income?" It ignores everything else (price changes, maturity gains or losses).

Bond Current Yield Examples

Premium bond (trading above par):

• $1,000 face value bond with a 6% coupon, trading at $1,100
• Annual coupon = $60
• Current yield = $60 / $1,100 = 5.45%
• Current yield is lower than the coupon rate because you paid more than face value

Discount bond (trading below par):

• $1,000 face value bond with a 6% coupon, trading at $900
• Annual coupon = $60
• Current yield = $60 / $900 = 6.67%
• Current yield is higher than the coupon rate because you paid less than face value

Exam Tip: Gotchas

• Current yield and price move inversely. When bond prices rise, current yield falls (and vice versa), because the coupon payment on a fixed-rate bond stays fixed while the denominator changes. A stock's dividend yield moves the same way only while the annual dividend itself is held constant; a dividend change also moves the yield.
• Current yield applies to both bonds and stocks. For bonds, use the annual coupon; for stocks, use the annual dividend. The denominator is always the current market price.

Current Yield vs. Yield to Maturity (YTM)

• Current yield considers only the annual income relative to the current price
• Yield to maturity (YTM) is a single discount rate that accounts for the coupon payments, time to maturity, and the difference between the current price and par value at maturity
• For a bond trading at par: current yield = YTM
• For a discount bond: current yield < YTM (because you also gain from price appreciation to par)
• For a premium bond: current yield > YTM (because you lose from price depreciation to par)

Exam Tip: Gotchas

• Current yield is an income-only measure. It does NOT account for the gain or loss when the bond matures at par, so it is not the same as YTM.
• For a conventional coupon-paying discount bond, the ranking is: coupon rate < current yield < YTM. For premium bonds, the ranking reverses: coupon rate > current yield > YTM. The exam frequently tests this ordering.

What Should You Check on Exam Day?

• Current yield = annual coupon or dividend / current market price; it measures income return only.
• Current yield and price move inversely as long as the coupon or dividend stays fixed while the price (denominator) changes; a dividend change also moves the yield.
• For a conventional coupon-paying bond: premium ordering is YTM < current yield < coupon rate; discount ordering is coupon rate < current yield < YTM; at par, all three are equal.
• Current yield ignores the price's pull to par at maturity; YTM accounts for that gain or loss, which is why the two differ for premium and discount bonds.