Current yield vs coupon rate
Coupon rate is the annual coupon divided by face value. Current yield is the same cash divided by the price you pay. A 5 percent coupon is 5.00 percent current yield at $1,000.00, 5.83 percent at $857.88, and 4.27 percent at $1,171.69.
| Current yield | Coupon rate | |
|---|---|---|
| Denominator | The live price. | Face value, $1,000.00 on this sheet. |
| At par | 5.00 percent, because the price is $1,000.00. | 5 percent. Par is the only price where they agree. |
| At a discount | 5.83 percent on a price of $857.88. | Still 5 percent. The two $25.00 coupons did not move. |
| At a premium | 4.27 percent on a price of $1,171.69. | Still 5 percent. The buyer paid more for the same cash. |
| What it ignores | The pull to face value at maturity: $142.12 of gain on the discount bond, $171.69 of loss on the premium bond. | The live price, entirely. Coupon rate cannot see a quote. |
| When you would pick it | Sizing this year's cash as a share of what you paid. | Reading what the issuer promised against face value, which is a contract fact, not a return. |
On this page
Same cash, two denominators
A $1,000.00 bond with a 5 percent coupon pays two $25.00 coupons a year. Coupon rate is that cash over face value, 5 percent, for the life of the bond.
Current yield is the same cash over the price. At par the price is $1,000.00 and current yield is 5.00 percent. When the market wants 7 percent the price falls to $857.88 and current yield rises to 5.83 percent. When the market wants 3 percent the price rises to $1,171.69 and current yield falls to 4.27 percent.
The coupons never moved. The denominator did.
How current yield works is that fraction. Current yield against yield to maturity is why 5.83 percent is not the 7 percent a discount-bond buyer earns if they hold to the end. Yield in the United States is quoted as a nominal annual rate in step with how the coupons arrive.
Do not read the coupon as the return
The coupon rate equals the cash return only when the price equals face value. The premium bond still pays a 5 percent coupon, hands its buyer 4.27 percent in cash on the $1,171.69 they paid, and still earns them only 3 percent if they hold to maturity, because $171.69 of that price is never coming back.
The error runs the other way on a discount bond, where the 5 percent coupon understates the cash on the $857.88 price. This is educational material, not financial advice.
Worked examples
At par, both read 5 percent
A $1,000.00 bond pays a 5 percent coupon twice a year for 10 years. The market rate is 5 percent. Price and current yield?
- Two coupons of $25.00 a year.
- Price is $1,000.00. Current yield 5.00 percent. Coupon rate 5 percent.
Price $1,000.00, premium or discount $0.00, current yield 5.00 percent, matching the coupon rate.
Discount: coupon 5 percent, current yield 5.83 percent
Same bond, market rate 7 percent.
- Price falls to $857.88, a discount of $142.12.
- Current yield 5.83 percent. Coupon rate still 5 percent.
Price $857.88. Current yield 5.83 percent. The two $25.00 coupons now cost less to buy.
Premium: coupon 5 percent, current yield 4.27 percent
Same bond, market rate 3 percent.
- Price rises to $1,171.69, a premium of $171.69.
- Current yield 4.27 percent. Coupon rate still 5 percent.
Price $1,171.69. Current yield 4.27 percent. The same $25.00 coupons cost more to buy.
Common questions
Why does the coupon rate never move?
Because it is cash over face value, and both of those were fixed when the bond was issued. Current yield uses the live price, so it moves whenever the quote does.
Is current yield the return if I hold to maturity?
No. It ignores the pull to face value. On the discount bond that pull is a $142.12 gain. Yield to maturity is the rate that counts it.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.