Current Yield

It is nothing but the ratio of the annual income by the current price of the security. It is also given by the formula

Current yield= Annual cash inflow/current market price.

It seen that the calculation is done using the current market price and not the face value. It is hence useful in determining the expected rate of return annually. It is usually used in case of bond value determination. This method is however not able to calculate the accurate value as the market value of the bond and share keeps on changing.

These current yields are usually used by the traders in determining the trading strategy.

Some of the basics that is followed by traders while using current yield in making investment decisions are,

• When the bonds are selling at discounts the value of the current yield will be more than the value of the discounts.
• If the current rates are more than the coupon rate then the bond is said to be at a premium rate. The investor will sell bonds if this current rate and coupon rate difference is more because  at this juncture the premium is more at this instant and the profit earned will also be more.
• When the interest rates raise the bond price falls.
• When the interest rates fall the bond price increases.
• By comparing the current yield of two periods it is possible to analyze the investment at a better picture.
• It is also useful in comparing two bonds of the same company at the same period.
• Using current yield as a criteria the bond performance can be determined.
• Current yield is also helpful in calculating the selling price of the bond to a third party before the maturity period.
• The current yield value to a huge extend depends on two basic factors they are the interest rate prevailing in the market and the credit worthiness of the issuer.

Thus the current yield is mostly used by traders while making decision related to the bonds purchase and sales. The investors usually ignore these calculations.

Questions

• What are the points to be noted in calculating the current yield?
• Define current yield along with its formula