Current yield is equal to a bond’s annual interest payment divided by its current market price. A bond with a 5% coupon purchased at $900 has a current yield of 5.56%. (Current yield equals $50 annual interest divided by $900 market price.) So an investor who pays $900 for a bond with a 5% coupon is earning a 5.56% current yield. Current yield does not factor in the price appreciation on a discount bond or the price depreciation on a premium bond that is held to maturity. For a par bond, nominal yield, current yield, and yield to maturity are equal. For a discount bond, nominal yield is less than current yield, which is less than yield to maturity. A premium bond has a nominal yield greater than its current yield, which is greater than its yield to maturity. |
