Current yield

Before you rely on it

What to check

Do not read it as a total return figure.

The common error

Where people go wrong with current yield

Buying a premium bond for its attractive current yield. The coupons are real, and so is the capital loss as the price grinds down toward par, which yield to maturity would have shown.

Worked through

Current yield in plain numbers

A bond pays a $50 annual coupon on a $1,000 face value. It trades at $950. Current yield is $50 ÷ $950, or 5.26%. If the price rises to $1,050, the current yield falls to 4.76%, and the coupon is the same, the price changed. Neither number tells the whole story, because the current yield ignores the gain or loss you will take at maturity. Buy at $950 and get $1,000 back, and part of your return comes from that $50 accretion. Yield to maturity captures it. The current yield does not.

Easily confused

Current yield and its neighbours

Current yield is not the coupon rate and not the yield to maturity. Coupon rate divides the coupon by face value. Current yield divides it by the current price. Yield to maturity adds the effect of buying above or below par and holding until maturity, so it is the most complete of the three. Current yield is also used for stocks in a different sense, where it is the dividend divided by price. In bonds it focuses only on income, which makes it useful for those who care about cash flow now.

In real decisions

Where current yield turns up

Income-focused investors use it to compare how much annual cash a bond provides per dollar invested; it is quick to compute from a price quote and a coupon. Funds sometimes report it alongside other yields; it helps when comparing bonds of similar maturity and credit quality, or a bond against a savings alternative. Retirees planning income from a bond portfolio look at it first. It is a simple, honest measure of income at today's price.

Know the edges

Where current yield stops being reliable

It leaves out capital gains or losses, reinvestment and the time to maturity, so a bond bought at a large discount or premium will show a current yield that misrepresents its return. For bonds with call features, it can overstate what you will actually collect. It also says nothing about credit risk. Use it for income comparisons, and rely on yield to maturity or yield to worst for a fuller picture of the return.

Quick answers

What people ask about current yield

Is current yield the same as coupon rate? No. The coupon rate divides the coupon by face value. Current yield divides it by the price you pay. A 5% coupon bought at 950 has a current yield of 5.26%.

When is current yield misleading? When the bond is far from par or has a short life. It ignores the gain or loss at maturity. Use yield to maturity for the complete return.