Current Yield Formula
Current Yield Formula
Current yield is the annual coupon payment divided by the bond's current market price. It answers the question: what percentage of my purchase price am I getting back in annual coupon income? It is simple, useful, and incomplete—it ignores capital gains or losses at maturity.
Key takeaways
- Current yield = annual coupon ÷ current price (both in dollars, or as a percentage)
- A $1,000 par bond with a $40 annual coupon trading at $950 has a current yield of 4.21% ($40 ÷ $950)
- Current yield rises when the bond price falls and falls when the bond price rises
- Current yield is useful for comparing income streams but ignores the capital gain or loss when the bond matures
- Current yield is not the same as yield to maturity; YTM is the more complete measure for total return
The formula
Current yield = Annual coupon (in dollars) / Current market price (in dollars)
Or, as a percentage:
Current yield % = (Annual coupon / Current market price) × 100
A concrete example
You own a corporate bond with a $1,000 par value, a 4% coupon, and a trading price of $950.
Annual coupon = 4% of $1,000 = $40 Current price = $950 Current yield = $40 / $950 = 0.0421 = 4.21%
You are earning 4.21% on your $950 investment in annual coupon income. If you hold the bond for one year and collect the coupon, you receive $40, which is a 4.21% return on your $950 purchase price.
Why current yield changes with price
Current yield moves inversely to price. When a bond's market price falls, its current yield rises. When the price rises, the current yield falls.
Imagine the same bond trades at $900 instead of $950.
Current yield = $40 / $900 = 4.44%
At $1,050, the current yield is:
Current yield = $40 / $1,050 = 3.81%
The coupon itself ($40 per year) never changes. But the yield on your money—the return relative to your purchase price—moves with the price. A lower purchase price gives you a higher yield on that income. A higher purchase price gives you a lower yield.
This inverse relationship is fundamental to bond markets. When interest rates rise, bond prices fall, and current yields rise to compensate. When rates fall, prices rise, and yields fall (you accept lower income because the bond price appreciated).
Current yield vs coupon rate
Do not confuse current yield with coupon rate. The coupon rate is set at issuance and never changes. It is expressed as a percentage of par value, not the market price.
A bond with a 4% coupon rate pays 4% of par, always. If par is $1,000, the coupon is $40 per year forever.
Current yield depends on the market price. That $40 coupon is a 4.21% return if you paid $950, a 3.81% return if you paid $1,050.
When a bond is trading at par (at $1,000), the current yield equals the coupon rate. When the bond trades at a discount (below par), current yield exceeds coupon rate. When the bond trades at a premium (above par), current yield is less than the coupon rate.
Current yield in practice: comparing income streams
Current yield is useful for comparing the income a bond provides relative to your purchase price. If you have $10,000 to invest and you are comparing two bonds:
Bond A: $1,000 par, 3% coupon, trading at $950
- Annual coupon: $30
- Current yield: $30 / $950 = 3.16%
Bond B: $1,000 par, 4.5% coupon, trading at $1,050
- Annual coupon: $45
- Current yield: $45 / $1,050 = 4.29%
Bond B gives you more annual income (4.29% of your purchase price vs 3.16%). If your goal is immediate income, Bond B looks better. But this ignores the total return, including the capital loss at maturity (you pay $1,050 but get $1,000 back).
Current yield is not total return
This is the crucial limitation of current yield: it ignores what happens at maturity. Current yield only measures the income you receive in the next year. It says nothing about the capital gain or loss that accrues when the bond matures or when you sell it.
A bond trading at $950 (discount) will give you a $50 capital gain at maturity ($1,000 par minus $950 purchase price). Current yield does not capture this gain. A bond trading at $1,050 (premium) will give you a $50 capital loss at maturity ($1,000 par minus $1,050 purchase price). Current yield ignores this loss.
For a complete picture of your return, you need yield to maturity (YTM), which accounts for all cash flows: the annual coupons and the capital gain/loss at maturity.
Current yield timeline
Current yield is a snapshot. It measures the return on the next year's coupon, assuming you hold the bond and collect that coupon. It is useful for:
- Comparing the current income from two bonds
- Assessing whether a bond's income is attractive relative to short-term rates (money market yields, savings account rates)
- Understanding the immediate cash flow impact of owning a bond
But current yield is not suitable for:
- Deciding whether to hold a bond to maturity (that requires YTM)
- Comparing bonds with different maturities (that requires duration or total return analysis)
- Assessing the bond's total return over your holding period (that requires YTM or return calculation)
Weighted average coupon in a bond fund
In a bond fund, the current yield of the fund is the weighted average current yield of all the bonds it holds. If a fund holds 100 bonds worth $50 million total, each bond has a price and an annual coupon. The fund's current yield is:
Fund current yield = Total annual coupons from all bonds / Total market value of all bonds
For example, if the fund's bonds generate $1.5 million in annual coupons and the fund's net asset value (NAV) is $100 million, the fund's current yield is 1.5%.
A bond fund's stated current yield is useful for understanding the income you will receive, but it does not tell you the total return. The fund's price may rise or fall depending on interest rate moves, and you will have capital gains or losses when you sell fund shares.
Current yield and duration
Current yield and duration measure different things. Duration measures how much a bond's price will move if rates change. A bond with higher duration is more price-sensitive. Current yield measures the coupon income relative to the purchase price. A bond with higher current yield delivers more annual income on your investment.
A high-coupon, short-maturity bond might have high current yield but low duration (not much price sensitivity). A low-coupon, long-maturity bond might have low current yield but high duration (very price-sensitive). These are independent dimensions.
Bond pricing tables and current yield
When you see a bond listed in a pricing service or brokerage platform, the current yield is typically quoted alongside the coupon, price, and maturity. A typical listing:
Description: 4.50% due 2032 Price: 102.50 Current yield: 4.39% YTM: 4.20%
The bond has a 4.5% coupon (so a $45 coupon on a $1,000 par bond). It is trading at 102.50 (meaning $1,025 for a $1,000 par bond). The current yield is 4.39% ($45 / $1,025). The YTM is 4.20%, which is lower than current yield because the bond is trading above par and you will lose $25 at maturity ($1,000 minus $1,025).
Current yield and accrued interest
When you buy a bond in the secondary market, you pay accrued interest (the interest earned since the last coupon date). Accrued interest affects your total cost but not the stated current yield. Current yield is quoted based on the clean price (the price excluding accrued interest).
If a bond's clean price is $950 and accrued interest is $5, you pay $955 total. The current yield is still quoted as $40 / $950 = 4.21%, not including the accrued interest in the denominator. The accrued interest is part of the next coupon payment, so it is a wash.
Current yield and callable bonds
For a callable bond, current yield is calculated the same way: annual coupon ÷ current price. But the significance changes if the bond is likely to be called. If rates fall and the bond is called, you do not earn the stated coupon indefinitely. You receive the coupon up to the call date and par at the call date, which may be before maturity.
For a callable bond, you should also calculate yield to call (YTC), which assumes the bond is called at the earliest call date. The YTC may be much lower than the current yield if the bond is deep in-the-money (priced well above par and likely to be called).
Historical context: current yield and market conditions
In 2020, after the Federal Reserve cut rates to near zero, bond current yields fell dramatically. A Treasury bond that had offered a 2% current yield in 2019 might offer 0.2% in 2020. The coupon did not change; the price rose because new bonds were being issued with near-zero coupons. Investors who wanted income had to reach for longer maturities, lower-quality bonds (corporate or high-yield), or other asset classes.
By 2022–2023, as the Fed raised rates, new bonds were issued with high coupons (5%, 6%), and existing bond prices fell. A bond that traded at $950 in 2020 might trade at $920 in 2023 if rates rose. Its current yield rose correspondingly, offering investors higher income again.
Relationship to other yields
Current yield is one of several yield measures:
- Coupon yield — the coupon rate (set at issuance, never changes)
- Current yield — coupon ÷ price (changes daily as price moves)
- Yield to maturity (YTM) — the IRR of the bond's cash flows (includes capital gain/loss at maturity)
- Yield to call (YTC) — the IRR if the bond is called at the earliest call date
- Yield to worst (YTW) — the lower of YTM and YTC
Each serves a different purpose. Current yield is useful for short-term income assessment. YTM is the standard measure for comparing total returns across bonds with different terms.
Conclusion: useful but limited
Current yield answers a simple question: what annual income will I get on my purchase price? It is easy to calculate and easy to understand. But it is incomplete because it ignores the capital gain or loss at maturity (or sale). For a complete assessment of a bond's attractiveness, pair current yield with yield to maturity. Current yield tells you the income story; YTM tells you the total return story.
Process
Related concepts
Next
Current yield measures annual income relative to your purchase price, but it skips the capital gain or loss at maturity. For the full return story—the total wealth change from buying and holding the bond to maturity—you need yield to maturity.