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How current yield works

Current yield is the annual coupon divided by the price you pay. A 5 percent coupon bond yields 5.00 percent at $1,000.00, 5.83 percent at $857.88, and 4.27 percent at $1,171.69. The coupon rate stays 5 percent at every price.

Price today

$1,000.00

$25.00 per coupon, twice a year, then $1,000.00 back at maturity. It trades at par.

Coupon per payment
$25.00
Coupon rate, on face value
5.00%
Current yield, on price
5.00%
Premium or discount
$0.00
$

What the issuer repays at maturity. Coupons are quoted on this, never on the price.

%

The annual rate, fixed when the bond is issued, so this one does not move. It is split across the coupons in a year.

%

What buyers want today on the same risk and maturity. This is the yield to maturity, quoted as an annual rate and split the same way.

yr

Priced on a coupon date, so this leaves a whole number of coupons still to come.

On this page

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Yield to maturity

In short

  • Current yield is annual coupon cash over the price a buyer pays. On a 5 percent coupon and a $1,000.00 price that is 5.00 percent, the same as the coupon rate, because the price is face value.
  • When the price falls to $857.88 the same two $25.00 coupons yield 5.83 percent. The coupons did not rise. The price did the work.
  • When the price rises to $1,171.69 the current yield falls to 4.27 percent. A buyer paid more for the same cash.
  • Coupon rate is the same cash over face value, and it never moves. Current yield is the same cash over the live price. They agree only at par.
  • 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.

Coupon cash over the price you actually pay

Current yield asks what this year's coupon cash is as a share of the price a buyer pays, not as a share of face value.

current yield=annual couponprice\text{current yield} = \frac{\text{annual coupon}}{\text{price}}

A $1,000.00 bond with a 5 percent coupon pays two $25.00 coupons a year. At a price of $1,000.00 the current yield is 5.00 percent. The coupon rate is also 5 percent, because it is the same cash over face value. Par is the only price where those two agree.

The bond price calculator on this page returns current yield next to the price. How bond pricing works is the present-value identity that produces that price. Yield in the United States is quoted as a nominal annual rate in step with how the coupons arrive.

Current yield against coupon rate is the pair on one table. This page owns the price in the denominator.

A cheaper bond is a higher current yield

Nothing about the bond changes. Buyers of comparable bonds now want 7 percent, so the price falls to $857.88. The two $25.00 coupons are untouched. Current yield is that cash over the new price, 5.83 percent.

The coupons did not get fatter. The buyer paid less for them. That is the whole of a current-yield move: the numerator is fixed when the bond is issued, and the denominator is the live quote.

A buyer at $857.88 also collects $1,000.00 at maturity, a $142.12 gain that current yield ignores. Yield to maturity is the rate that counts that gain. On this sheet YTM is 7 percent, the market rate that produced the price.

A dearer bond is a lower current yield

The same bond again, but now comparable bonds yield 3 percent. The price rises to $1,171.69. Current yield falls to 4.27 percent, because the same two $25.00 coupons cost more to buy.

A buyer at this price also takes a known loss at maturity, when the bond repays $1,000.00 rather than the $1,171.69 they paid. Current yield does not mention that $171.69. It only reports this year's cash on this year's price.

How bond duration works is how far the price moves when the market rate moves. Current yield is the cash-on-price reading after that move has already happened.

Three rates, one bond

The coupon rate is cash over face value. It is printed on the bond and never changes. Current yield is cash over price. Yield to maturity is the discount rate in the price formula.

At par all three read 5 percent on this sheet. Off par they split. The discount bond's current yield sits between the 5 percent coupon and the 7 percent YTM. The premium bond's current yield sits between the 5 percent coupon and the 3 percent YTM. Current yield always moves toward YTM as the price leaves par, and it never quite arrives, because it still ignores the pull to face value.

How bonds work is the claim. This page is one of the three rates attached to it.

What current yield is silent on

It is silent on the gain or loss at maturity. It is silent on reinvestment of the coupons. It is silent on a bond that pays no coupon: a zero has a current yield of zero at any price above nothing, which is not a description of the return.

It is also not a promised holding-period return. It is this year's coupon cash as a share of today's price. A buyer who needs that cash this year can read it. A buyer comparing two bonds to hold to the end wants yield to maturity.

What this page is not doing

It is not a forecast of rates, not a duration lesson, and not a ranking of issuers. The three sheets are a 5 percent coupon at par (current yield 5.00 percent, price $1,000.00), the same coupons at $857.88 (5.83 percent), and the same coupons at $1,171.69 (4.27 percent). This is educational material, not financial advice.

Worked examples

A bond priced at par

A $1,000.00 bond pays a 5 percent coupon in two payments a year and matures in 10 years. Bonds of the same risk and maturity are yielding 5 percent. What is it worth, and what is the current yield?

  1. Work out the cash coupon, which is face value times the coupon rate: 1000×0.05=501000 \times 0.05 = 50 a year, paid as two coupons of $25.00.
  2. Set the period rate and the number of periods: i=0.05/2=0.025i = 0.05/2 = 0.025 and n=10×2=20n = 10 \times 2 = 20.
  3. Discount the 20 coupons: 25×1−1.025−200.025=25×15.589162=389.7325 \times \frac{1 - 1.025^{-20}}{0.025} = 25 \times 15.589162 = 389.73.
  4. Discount the face value: 1000×1.025−20=1000×0.610271=610.271000 \times 1.025^{-20} = 1000 \times 0.610271 = 610.27.
  5. Add the two present values: 389.73+610.27=1000.00389.73 + 610.27 = 1000.00.
  6. Current yield is the annual coupon over the price: 50/1000=0.0550 / 1000 = 0.05, which is 5.00 percent.

The bond is worth $1,000.00, exactly its face value, so it trades at par. The premium or discount is $0.00. The current yield is 5.00 percent, the same as the coupon rate, and on a bond that pays a coupon at all, par is the only price where those two agree.

The same bond when the market wants 7 percent

Nothing about the bond changes. Rates move, and buyers of comparable bonds now want 7 percent. What happens to the price and the current yield?

  1. The coupon is untouched at $25.00 twice a year, because the coupon rate is fixed against face value.
  2. Only the discount rate moves: i=0.07/2=0.035i = 0.07/2 = 0.035, with n=20n = 20 as before.
  3. Discount the coupons: 25×1−1.035−200.035=25×14.212403=355.3125 \times \frac{1 - 1.035^{-20}}{0.035} = 25 \times 14.212403 = 355.31.
  4. Discount the face value: 1000×1.035−20=1000×0.502566=502.571000 \times 1.035^{-20} = 1000 \times 0.502566 = 502.57.
  5. Add them: 355.31+502.57=857.88355.31 + 502.57 = 857.88.
  6. Measure the gap against face value: 1000−857.88=142.121000 - 857.88 = 142.12.
  7. Current yield: 50/857.88=0.058350 / 857.88 = 0.0583, or 5.83 percent.

The price falls to $857.88. The bond changes hands for 142.12 less than the $1,000.00 it repays at maturity, which is what trading at a discount means. The current yield rises to 5.83 percent, because the same $25.00 coupons now cost less to buy.

The same bond when the market wants 3 percent

Same bond once more, but this time buyers of comparable bonds will accept 3 percent. What is it worth now, and what is the current yield?

  1. The coupon is unchanged again at $25.00 twice a year.
  2. i=0.03/2=0.015i = 0.03/2 = 0.015 and n=20n = 20.
  3. Discount the coupons: 25×1−1.015−200.015=25×17.168639=429.2225 \times \frac{1 - 1.015^{-20}}{0.015} = 25 \times 17.168639 = 429.22.
  4. Discount the face value: 1000×1.015−20=1000×0.742470=742.471000 \times 1.015^{-20} = 1000 \times 0.742470 = 742.47.
  5. Add them: 429.22+742.47=1171.69429.22 + 742.47 = 1171.69.
  6. The gap against face value: 1171.69−1000=171.691171.69 - 1000 = 171.69.
  7. Current yield: 50/1171.69=0.042750 / 1171.69 = 0.0427, or 4.27 percent.

The price rises to $1,171.69, a premium of $171.69 over face value. The current yield falls to 4.27 percent, because the same $25.00 coupons cost more to buy. A buyer at this price also takes a known loss at maturity, when the bond repays $1,000.00 rather than the $1,171.69 they paid for it.

Common questions

Why is current yield not the return?

Because it counts this year's coupon cash and stops. A buyer of the $857.88 bond also collects $1,000.00 at maturity, a $142.12 gain that current yield ignores. Yield to maturity spreads that gain across the remaining years.

When do current yield and the coupon rate match?

Only at par. On this sheet that is a price of $1,000.00, where both read 5.00 percent. Off par the coupon rate stays 5 percent and current yield moves with the price.

Does a zero-coupon bond have a current yield?

The formula would print zero, because there is no coupon cash this year. That is not a description of the return. A zero's return is the pull from price to face value, which is a yield-to-maturity question.

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.