Current yield refers to the yearly income from an investment, like interest or dividends, divided by the security’s current price. It focuses on the bond’s market price instead of its face value. This metric shows what return an investor might expect if they bought the bond and kept it for a year. But keep in mind, the current yield isn’t the same as the actual return if the bond is held until it matures.
Learn more about Current yield
It usually refers to bond investments, which are securities sold to investors at a face value of $1,000. Each bond has a specified interest rate, known as the coupon, printed on the bond certificate, and these bonds can be bought and sold among investors. Because the market price of a bond fluctuates, an investor might buy a bond for less than its face value (at a discount) or for more (at a premium), and this purchase price influences the current yield.
Formula of Current yield
You can figure out the current yield for stocks by dividing the dividends you get by the stock’s current market price.
Coupon Rate = Annual Cash Inflows / Market PriceHow It Is Calculated
When an investor picks up a bond with a 6% coupon rate for $900, they make an annual interest of ($1,000 X 6%), which is $60. This gives a current yield of ($60) / ($900), or 6.67%. The $60 interest stays the same no matter what the bond costs. But if someone buys a bond for $1,100, the current yield drops to ($60) / ($1,100), or 5.45%. They paid more for the premium bond but still get the same interest, so the yield is lower. You can also figure out the current yield for stocks by dividing the dividends by the stock’s current market price.
Conclusion
It is an easy but effective way to see how much money a bond makes compared to its market price. It doesn’t factor in capital gains or losses, but it’s a useful overview for those focused on income. If you’re creating a conservative portfolio or seeking reliable income, knowing about it can help you make smarter investment decisions.