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:

Current Yield=Annual Coupon PaymentCurrent Market Price\text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Current Market Price}}

For stocks:

Current Yield=Annual DividendCurrent Stock Price\text{Current Yield} = \frac{\text{Annual Dividend}}{\text{Current Stock Price}}

Think of it this way: Current yield answers one question: "What percentage of my purchase 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
Bond Price vs. ParCurrent Yield vs. Coupon Rate
Premium (above par)Current yield < coupon rate
At parCurrent yield = coupon rate
Discount (below par)Current yield > coupon rate

Exam Tip: Gotchas

  • Current yield and price move inversely. When bond prices rise, current yield falls (and vice versa), because the coupon payment stays fixed while the denominator changes.
  • 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) includes current yield plus the gain or loss from the difference between the purchase 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)
Bond PriceCurrent Yield vs. YTM
DiscountCurrent yield < YTM
ParCurrent yield = YTM
PremiumCurrent yield > YTM

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 discount bonds, 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.