The current yield, interest yield, income yield, flat yield, market yield, mark to market yield or running yield is a
financial
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
term used in reference to
bond
Bond or bonds may refer to:
Common meanings
* Bond (finance), a type of debt security
* Bail bond, a commercial third-party guarantor of surety bonds in the United States
* Chemical bond, the attraction of atoms, ions or molecules to form chemica ...
s and other
fixed-interest securities such as
gilts
Gilt-edged securities are bonds issued by the UK Government. The term is of British origin, and then referred to the debt securities issued by the Bank of England on behalf of His Majesty's Treasury, whose paper certificates had a gilt (or gilde ...
. It is the ratio of the annual interest (
coupon
In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product.
Customarily, coupons are issued by manufacturers of consumer packaged goods
or by retailers, to be used in r ...
) payment and the bond's
price
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
:
According to Investopedia, the
clean market price of the bond should be the denominator in this calculation.
Example
The current yield of a bond with a face value (F) of $100 and a
coupon rate
In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product.
Customarily, coupons are issued by manufacturers of consumer packaged goods
or by retailers, to be used in r ...
(r) of 5.00% that is selling at $95.00 (clean; not including accrued interest) (P) is calculated as follows.
Shortcomings of current yield
The current yield refers only to the yield of the bond at the current moment. It does not reflect the total return over the life of the bond, or the factors affecting total return, such as:
* the length of time over which the bond produces cash flows for the investor (the maturity date of the bond),
* interest earned on reinvested coupon payments, or
reinvestment risk
Reinvestment risk is a form of financial risk. It is primarily associated with fixed income securities (including bonds), in the form of early redemption risk and coupon reinvestment risk.
Early redemption
One form of reinvestment risk is the ...
(the uncertainty about the rate at which future cash flows can be reinvested), and
* fluctuations in the market price of a bond prior to maturity.
Relationship between yield to maturity and coupon rate
The concept of current yield is closely related to other bond concepts, including
yield to maturity
The yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, ho ...
(YTM), and
coupon yield
In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product.
Customarily, coupons are issued by manufacturers of consumer packaged goods
or by retailers, to be used in r ...
. When a coupon-bearing bond sells at;
* a discount: YTM > current yield >
coupon yield
In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product.
Customarily, coupons are issued by manufacturers of consumer packaged goods
or by retailers, to be used in r ...
* a premium:
coupon yield
In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product.
Customarily, coupons are issued by manufacturers of consumer packaged goods
or by retailers, to be used in r ...
> current yield > YTM
*
par: YTM = current yield = coupon yield.
For zero-coupon bonds selling at a discount, the coupon yield and current yield are zero, and the YTM is positive.
See also
*
Adjusted current yield
References
Current Yieldat investopedia.com
Mathematical finance
Bond valuation
Fixed income analysis
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