current yield

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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 f ...
term used in reference to bonds 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 gil ...
. 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 th ...
: $\text = \frac.$ 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) of 5.00% that is selling at$95.00 (clean; not including accrued interest) (P) is calculated as follows. $\text = \frac = \frac = \frac = 5.2631\%$

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 th ...
(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, h ...
(YTM), and coupon yield. When a coupon-bearing bond sells at; * a discount: YTM > current yield > coupon yield * a premium: coupon yield > 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.