Current yield

Current yield is a simple measure of a bond's income return, calculated by dividing its annual coupon payment by its current market price rather than by its par value.

The formula is:

A bond with a face value of one thousand dollars, a five percent coupon, and a current market price of nine hundred dollars has a current yield of about five and a half percent, since the fifty dollar annual coupon is being measured against the lower price paid.

Current yield only accounts for the coupon income, it ignores any capital gain or loss that will occur if the bond was bought at a price other than par and is later redeemed at par value at maturity. A bond trading well below par has a current yield that understates its true return, since it also captures a gain as the price pulls back to par by maturity, while a bond trading well above par has a current yield that overstates its true return for the same reason in reverse.

Because of this gap, current yield is best used as a quick, rough gauge of income relative to price, while yield to maturity is the more complete measure for comparing bonds that are trading at different premiums or discounts to par value.