Current Yield

Current yield is the investing term which is applied to the bonds. The fundamental concept behind the current yield is to evaluate the relationship between the annual interest earned by the bond issue and the current value of the bond. By computing the difference between the two aspects, it is possible to enter at the current annual rate of return on the investment.  One of the most important things to remember about the current yield is that this ratio between the interest earned and the price of the bond just represents the present status of the investment. 

The term current yield was adequate to explain why and how bond prices change, but the most important measure of a bond’s return to the long term bondholder is called the yield to maturity.  At par, a bond’s yield to maturity equals its current yield and its coupon rate, but is a bond is purchased at a premium or at a discount; its yield to maturity will be either less or more than its current yield.  At any price other than par, the yield maturity differs from and is more accurate than the current yield.  It recognizes that, in addition to the annual interest payments received during the life of the bond, the bondholder can also receive a capital gain or loss at maturity if there is a difference between the purchase price and the face value. Yield to maturity computes the compound annual interest gained or lost on this difference, assigns ( or more exactly “amortizes”) a portion to each year of the bond’s remaining life and expresses the result as a single annual percentage rate. In effect, if a bond is purchased at a discount then the yield to maturity is higher or greater than the current yield. If a bond is bought at a premium, the yield to maturity is less than current yield.

Questionnaire:

• What is current yield?
• What is yield to maturity?