What is a Current Yield?

Malcolm Tatum

Current yield is an investing term that is applied to bonds. The basic concept behind the current yield is to assess the relationship between the annual interest generated by the bond issue and the current price of the bond. By calculating the difference between the two factors, it is possible to arrive at the current annual rate of return on the investment.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

One thing to keep in mind about the current yield is that this ratio between interest generated and the price of the bond only represents the current status of the investment. There are other formulas that are used to figure the percentage return on the bond over the long term, beginning with date of acquisition and going all the way through to maturity. For a broader picture of the performance of a bond issue, such strategies as the yield to maturity approach or the coupon yield are much more helpful than assessing the current yield.

Still, current yields are very helpful in determining the rates of return that are being realized in the here and now. By calculating the current yield for one or more periods, it is possible to compare the periods and get a much better picture of the overall risk that has been involved with the investment. This information can be helpful when considering the purchase another bond issue from the same company or entity, as the investor already has a grasp of the range of high and low returns throughout the previous bond issue. Chances of a new bond issue from the same source performing in a similar manner are usually quite good, unless there are significant shifts in fundamental factors surrounding the bond issuer.

Calculating the current yield also provides a valuable piece of information that can be applied to other pertinent calculations involving the performance of a bond. The current yield can be helpful when contemplating selling the bond to a third party before the maturity date is realized. Knowing this factor can help to demonstrate the coupon yield that the new owner can expect to realize from assuming ownership of the bond. Depending on the level of performance, the current yield can allow the current owner to obtain a reasonable price for selling his or her remaining interest in the bond, or indicate that it would not be a good financial move to sell the bond at this point in time.

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