What is the Current Yield?
How Does the Current Yield Work?
The formula for current yield is defined as follows:
CY = Annual interest payment / CurrentPrice
For example, let's assume a particular bond is trading at par, or 100 cents on the dollar, and that it pays a coupon rate of 3%. In this case, the bond's current yield will also be 3% (as shown below).
CY = 3 / 100 = 3.00%
However, let's now assume that the same bond is trading at a discount to its par value. For the sake of example, let's say investors can now purchase the bond for just 95 cents on the dollar. In this case, even though the bond will still be paying a 3% coupon, its current yield will actually be slightly higher (as shown below):
CY = 3 / 95 = 3.16%
As another example, let's say the bond is trading at a premium to its face value -- 110 cents on the dollar. In this case, even though the bond will still be paying a 3% coupon, its current yield will actually be quite a bit lower (as shown below):
CY = 3 / 110 = 2.73%
[Use our to measure your annual return if you hold a particular bond until its first Calculatorcall date.]
[Use our to measure your annual return if you plan to hold a particular bond until Calculatormaturity.]
Why Does the Current Yield Matter?
The important thing to note here is that for most bonds, the stated coupon rate will usually remain the same (in this case, 3%). However, as the prevailing level of interest rates changes over time, the return that investors will require (the current yield) in order to hold a specific bond will fluctuate. As a result, investors will send bond prices higher or lower until the current yield on that bond is equivalent to other securities with similar risk profiles.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Albert Einstein called compounding "the greatest mathematical discovery of all time." For those regularly carrying hefty debt on their monthly credit card bill, Einstein's law of financial...Read More →
Sometimes it seems like life is one never-ending battle against scam artists trying to part you from your money...Read More →
Investing in a stock isn't throwing your money into a poker pot and betting you'll magically become rich...Read More →
We're so used to the idea that we need $1 million or $2 million to retire, that we forget about the real issue when it comes to our retirement spending. There's...Read More →