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 Does Current Yield Measure?

• 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

How Do You Calculate Current Yield?

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).

How Does Current Yield Work for Premium and Discount Bonds?

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.

How Does Current Yield Compare to 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.