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Current yield

From Wikipedia, the free encyclopedia
Ratio of interest to price for a bond

Thecurrent yield,interest yield,income yield,flat yield,market yield,mark to market yield orrunning yield is afinancial term used in reference tobonds and otherfixed-interest securities such asgilts. It is the ratio of the annual interest (coupon) payment and the bond'sprice:

Current yield=Annual interest paymentCurrent price.{\displaystyle {\text{Current yield}}={\frac {\text{Annual interest payment}}{\text{Current price}}}.}[1][2]

Example

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The current yield of a bond with a face value (F) of $100 and acoupon rate (r) of 5.00% that is selling at $95.00 (clean; not including accrued interest) (P) is calculated as follows.

Current Yield=F×rP=$100×5.00%$95.00=$5.00$95.00=5.2631%{\displaystyle {\text{Current Yield}}={\frac {F\times r}{P}}={\frac {\$100\times 5.00\%}{\$95.00}}={\frac {\$5.00}{\$95.00}}=5.2631\%}

Shortcomings of current yield

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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, orreinvestment risk (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.[3]

Relationship between yield to maturity and coupon rate

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The concept of current yield is closely related to other bond concepts, includingyield to maturity (YTM), andcoupon yield. When a coupon-bearing bond sells at;

For zero-coupon bonds selling at a discount, the coupon yield and current yield are zero, and the YTM is positive.

See also

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References

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  1. ^Martinelli, Lionel, Priaulet, Phillippe and Priaulet, Stephane (2003).Fixed Income Securities: Valuation, Risk Management and Portfolio Strategies. Chichester, England: John Wiley & Sons. p. 49.ISBN 0-470-85277-1.{{cite book}}: CS1 maint: multiple names: authors list (link)
  2. ^Thau, Annette (2001).The Bond Book (Revised ed.). New York: McGraw-Hill. pp. 102–104.ISBN 0-07-135862-5.
  3. ^Thau op cit p. 56.
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